Buying a house should be considered a project, if not a "family business" investment. It's undoubtedly one of the most important investments you will ever make in your life, and if you don't plan every aspect of your life that surrounds this purchase, it could turn out to be the worst investment of your life. Or it could be your best investment, becoming your sanctum sanctorum.
Your decision will affect every member of the family, whether you realize it now or not. Plan loosely long before buying, or the financial stress afterwards can cause family rifts. I've seen it happen. Take some time beforehand to do some relatively easy planning, and every member of your family could eventually learn something valuable about personal finance. (Once they're old enough to appreciate what you teach them.)
You generally need at least 5-10% of purchase price, which I think is low, considering how much you're indebted as soon as you buy a house. But if you don't have at least 20% down payment, you'll need PMI (private mortgage insurance) or a piggyback mortgage. Piggyback mortgage interest is tax deductible.
Why do you need to have 20% to avoid PMI? It's only my hypothesis, but I'm thinking that if you cannot save that much before you get into mortgage debt, how are you going to manage afterwards? It's so very easy to forget about all the extra expenses that a house generates. What better way to prove you're ready to own a home than saving at least 20%?
When people decide they don't want to pay someone rent anymore, they often forget about several expenses in particular, besides the mortgage. I hear people say, "I'm paying $900/mth rent, so I shouldn't have trouble paying a mortgage of $1100/mth. I'm going to buy a house." It's easy to forget additional expenses: (1) potential/ emergency repairs; (2) general home maintenance costs, such as lawnmowing, now removal, garbage pickup, gratuities around Christmas; (3) insurance premiums (life and home); and (4) property taxes.
Homeowners in the US tend to have more tax writeoffs for mortgages than, say, Canadian homeowners, but property taxes have to be paid everywhere. This tax often seems to anger or irritate people, but primarily because they don't plan for it as a monthly expense now, and hope that, somehow, the tax will go away before payment time comes.
So before you decide to buy, factor in all the extra costs you will be paying if you give up renting. And of course, the smaller your down payment, the larger your monthly mortgage will be. If it's too small, you'll be paying PMI. If you save more than 20%, you'll have more equity when you buy, as well as a smaller monthly mortgage payment, which will give you a better credit rating.
Let's skip forward a bit and say that you've already saved your down payment and are at the stage that you want to look at some homes. Make sure that you ask each current owner (if the house has one) what the property taxes for the past few years have been. Save for the maximum amount, not the average. If the house is new, ask future neighbors if they wouldn't mind telling you, approximately, what they're paying. If you have no luck in this regard (not everyone wants to reveal this info), ask your real estate agent for an approximate property tax for the area. They tend to have access to this information.
For property taxes, because they're typically paid one to four times per year, depending on where you live, you could save money in a CD (Certificate of Deposit) for 3-, 6- or 12-month periods. Save for property taxes on a monthly basis, instead of scrambling for the entire amount last minute. It's tough, but considere that doing so means you'll gain a bit of interest. So then it's become an investment, at least psychologically.
For emergency funds for house repairs, etc., you want the money to be more liquid than a CD. A credit card might do in a pinch, but if you don't pay it off right away, your total costs obviously go up. So I'd say go with an online savings account.
Depending on how much you plan to save in your emergency fund, you might consider the Capital One Direct Banking "Money Market Account" because it allows you to write cheques on it, up to a maximum of three times per month. There are a long list of fees, and certain conditions, though, so weigh out your options. Alternately, there are online savings accounts from Emigrant Direct and Ing Direct, neither of which have any fees, minimum balances, or conditions.
As for regular maintenance costs, this is money you'll be spending frequently - maybe weekly or more often. Some of the expenses might be in cash or cheque - rarely ATM cards. Unless you have an online savings account that allows you unlimited transactions and frequent money transfers, you might want to keep this money in a regular savings account and withdraw a "buffer" amount once a week. Keep it in a safe place at home, inside of a locked cash box.
Now let's back up to "just thinking about buying". You have a picture now of all the financial tasks you'll have to do in the future, just before you buy a house, and afterwards for as long as you own it. Are you up to it? If so, it's time to start saving.
How much should you save? It's not a hard and fast rule, but I've always heard that whether or not you own a home, you should save six months "operating costs". That's a lot of money for some people, but you don't have to save it all at once. Build up to it.
That's just for operating costs. You also need to save for the down payment as well. If you can estimate what your operating costs will be, and work towards saving six months worth, first, you'll see whether you can take the financial responsibility. If you can, then you'll probably find that you feel like saving even more money, now towards the down payment, and especially if you're earning interest.
Save towards the down payment in an account separate from your "operating costs" account. A long-term CD or bond is probably a good idea, because then you don't have much chance to spend the money on something else. And you'll get a higher interest rate. Now, when you're ready to buy your house, you'll have both six months approximate operating costs as well as the down payment towards the purchase price. (The operating costs will keep earning you interest until that time you should need some or all of it.)
In summary, ask yourself what price range you want to aim at. Can you really afford it? Don't overreach your finances just because someone you know has a big house. Enjoy what you purchase, but purchase what you can afford. If you've go no one to teach you savings discipline, then you'll have to find it on your own.
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