Tuesday, November 10, 2009

How Much Should You Save for a House?

Now that my husband has a good job and the real estate market is friendlier to first-time home buyers, we've decided to start the search for Our. First. Home. Exciting! Scary! Nervewracking! EXPENSIVE!!!! All of these words come to mind when buying a home and definitely the last word...here in Seattle, the median price for a home is between $400,000 and $500,000! Not a super affordable place to live, but I know those of you who live in California are going to tell me I'm lucky prices are so low.

So we've been doing a little research about how much to save. As mentioned before, we did a really good job of saving over the past year, but factoring in all of the costs for a house, I'm not sure it's enough.

I'd love to get some tips and hear stories from those of you who have been in my shoes before. Besides a down payment, what else did you save for when buying a house? Closing costs? House emergency fund? Anything you wish you did differently in your search? I'd love any of your advice! Thanks, readers!


  1. The minimum you can put down currently is 3.5% for a FHA loan. That does not include closing costs which are typically another 2-2.5% but those can be "wrapped into the loan." The rate differential between a FHA and Conventional Loan with 20% down is practically immaterial. Ultimately, I usually ask the questions: (1) what payment can you afford while maintaining your same quality of life; and, (2) what are your long-term plans for the home (i.e., house for life, future rental, etc.). Answers to those questions ultimately dictate the downpayment but certainly more is better but I encourage clients to think more about how they can pay off their property in 15 years. This puts you in your mid-40's and in position to do some amazing wealth building. Regarding an emergency fund, I recommend to my clients 4-6 months. The biggest overlooked expense is decorating. Some estimate you should expect to spend 10% of the purchase price on decorating. That seems high to me. That said, it's easy to spend 10-15k on decorating especially if it needs appliances and blinds.

  2. Another thing to note is the 8k fist time homebuyers credit has been extended to April 2010. It's a fully refundable credit meaning you get every dollar back that exceeds your tax liability for the year. More than that, you don't need to close on a home in 2009 to claim the credit on your 2009 return. As long as the house closes before you file your 2009 return in 2010 you can claim the credit. So, don't rush to file your 2009 return if you think you'll buy a house before the credit expires. In fact, I'm also advising clients to maximum their itemize deductions by defering closing on a house until January 2010 (rather than December 2009).

  3. Thanks D-Nic for the really helpful insights! I'm so excited the credit got extended!

  4. Don't put any more down than you have to, but have at least 5% plus six months mortgage in your bank account and untouchable. Leaving that money in your account means if you lose your job you can use it to pay the bills. With 5% plus six months you can lose both jobs in your household for at least six months *and* have a 5% price drop without going underwater or defaulting. Putting it towards the house doesn't buy you anything except a few hundred dollars a year in interest, easily worth it for the safety margin on your most expensive asset. As your home appreciates you can turn that 5% into retirement or rainy day savings and invest it more aggressively.

    Be sure to factor in homeowners' dues. They can be $300 a month or more for condos and $150 for homes. Analyze your big potential failure points for repairs, repair costs vary dramatically depending on age of appliances. Be absolutely sure to get enough insurance, homeowners' insurance is not very expensive for what you get.

    Get a smaller place than you can afford. Your house is by far the most expensive thing you'll own and you can save huge amounts of money by getting something just slightly less nice. On the other hand, every time you move it costs about 6-8% (4-6% realtor fees plus 1.8% King County excise tax), so don't buy a place you won't want to stay in. Don't get suckered by nice finishes, if you find a place with bad flooring or kitchen, you can usually fix it up and come out ahead financially, and you'll have a kitchen that matches your tastes.

  5. Thanks David - that's really smart about having 6 months of mortgage payments saved up.