According to the most recent statistics, in 2023 the average cost of a house in the United States is approximately $391,000, which means you can expect to spend roughly this amount. However, to know exactly how much money you need to have set aside, it is best to create a realistic budget. Here are five tips to achieve this.
Determine how much you can afford to pay for a house
One of the first steps you’ll need to take is to create a detailed list of your income and expenses. Having an approximate total of your monthly expenses will help give you an idea of where you can cut costs and which expenses are fixed.
Doing this will help you determine the approximate amount you can afford to spend on a home. Initially, it might seem that a monthly mortgage payment between $1,000 and $1,500 is reasonable based on your budget, but you must remember that you’ll also need to include other expenses such as utilities, health insurance, food and home repairs. Then, you’ll need to determine the amount of cash you must save for a down payment.
Plan to save enough for a down payment
If you’re getting a conventional or FHA loan, you’ll be required to make a down payment. First-time homebuyers can make a down payment as low as 3% – 3.5% of the total cost of the home, which significantly increases how much you need to have in the bank before you’re ready to purchase.
The down payment required for a house will depend on the type of mortgage you choose, as well as your credit history and whether you’re a first-time home buyer. For example, with a conventional loan, a cash down payment of as little as 3% of the total cost of the home is required. Rocket Mortgage provides you information about the different types of mortgages available.
Keep in mind that a lower down payment may come with less-favorable terms. With a conventional loan, you’ll be required to pay private mortgage insurance (PMI) if you put down less than 20%. With an FHA loan, you’ll be required to pay a mortgage insurance premium (MIP) throughout the life of the loan if you put down less than 10%. The MIP can be removed from the loan after 11 years if you put down at least 10%.
Set aside money for closing costs
How much money should you allocate for closing costs? The purchase of a property should not represent a risk to your financial health, therefore, it is important to consider closing costs when coming up with a budget. According to Rocket Mortgage, on average, you should set aside between 3% and 6% of the sale price of the property.
Closing costs include things such as origination fee, attorney’s fees, credit report, title fees, homeowner’s insurance, private mortgage insurance and taxes. This part of your budget should also include the cost of the home inspection, which generally runs between $200 and $500. This will give you vital information about the condition of the house and any repairs that may be needed. Rocket Mortgage has gathered data for this step here.
Don’t forget the cost of moving and repairs
Your expenses don’t end when you close on your new home so it’s important to take into account everything involved in moving. This includes any renovations or repairs — especially in older properties — as well as the purchase of appliances, pest control, paint, finishes and moving costs.
There are many tools and strategies to ensure you meet your financial goals when buying a house, such as following the 50/30/20 rule. Do you know it?
Follow the 50/30/20 rule
This is a tool that is useful for making medium- and long-term financial decisions. It consists of allocating 50% of your income towards meeting the necessary payments to cover basic life needs, 30% towards expenses that could be considered optional and 20% of your total income towards a savings account.
Following this rule could help you set more precise goals and stick to a spending limit that allows you to cover the cost of purchasing your home, moving and making repairs, and establishing a monthly mortgage payment that you can afford.
Maintaining a balanced financial life and getting into the habit of saving (as much as possible) could make all the difference when you’re house hunting. Remember that it is an investment that will yield both long- and short-term rewards and that there are options so you can find the financing that best suits your particular needs. As a tool to assist you in estimating a home loan, Rocket Mortgage offers a Mortgage Calculator on its website.
Want to learn more? Visit rocketmortgage.com.