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5 Ways to Save on Costs When Buying a House

If you are a first-time home buyer or maybe it’s been a while since you last purchased your home, this article will help inform you on the home-buying process and related costs.

Even if you have a good idea of how it normally works, you may find a golden nugget that will help you save in an area you were not aware.

Let’s go over how the process works traditionally when you are buying a new home and where to find savings.

 1. Hire an experienced, trusted Real Estate Agent.

A good realtor will save you a lot of time, money and energy. While some first-time home buyers will try saving money by not using an agent, this will hurt more than help. An experienced realtor will be able to negotiate on your behalf and save you money in areas you didn’t know about.

They also have advertising budgets to get the word out to buyers. As the buyer, you normally don’t pay the realtor anyway- the seller does. Realtors get paid at the close of the sale on the house. Their compensation is 100% commission based and they don’t make anything until the house closes escrow.

The home seller typically pays the costs out of their home sale. In a situation where the buyer is helping cover the cost, it would generally be between 1% - 3% and the seller would cover 3% to 4% of the cost. Check with your agent on what is being worked out in the contract with the listing agent brokerage, as far as who is covering closing costs.

The realtor fee is a percentage of the sale price, commonly 6%. For example, if the home sells for $500,000, the realtors will get $30,000- split up between the broker and both the buyer’s agent and listing agent.

 

2. Have 20% saved for the down payment.

If you have less than a 20% down payment, you will be stuck paying Private Mortgage Insurance (PMI). This is insurance to cover the loan itself, so that if a borrower defaults on the loan, the lender is reimbursed for the funds lost. Here’s a list of reasons to avoid PMI. Your mortgage loan interest rate could potentially be lower also with a bigger down payment.

 

3. Get loan quotes from multiple lenders and do price comparisons.

Lenders will each have different interest rates, so it’s recommended that you get mortgage loan quotes from 3-4 different lenders. They also have different fees they charge, which you can see in their loan estimate; for example, loan application fee, loan origination fee, etc.

Find a couple lenders that you are comfortable with, and negotiate with them to see who is the best fit.

 

4. Increase your credit score.

Your loan will be cheaper, the higher your credit score is. The lender fees and interest rates are directly related to your credit score. Here are a few simple things you can do to get it higher before applying for a loan.

  • Pay down any credit card balances. It is recommended to keep your credit card balance at or below 15% of your spending limit. For example, if your spending limit is $10,000, your balance should be $1,500 and below.

  • Don’t apply for new loans or credit. When you open a new account, your credit score will take an initial drop for a couple months. Hold off on buying any new cars or getting any new credit cards if you plan on applying for a mortgage loan soon. 

 

5. Find a house that needs some work.

Most buyers are looking for a home where they won’t need to make any upgrades. It certainly is nice if you can afford a move-in ready home, but it comes at a higher price.

If you find a house that needs some love, but you can still function in it while putting off improvements, you can save upfront on the house sale cost. This will give you time to save up for the upgrades, once you are moved in. There are even mortgage loans that will help pay for renovations, such as Fannie Mae and others.

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5 Steps to Save Up For a House Down Payment

Step 1: Determine how much you will need to save.

Find out how much of a mortgage you can qualify for by talking to a mortgage lender. Your housing expense should not exceed 28% of your stable monthly income.

For example, if your income is $4,500/month, you can safely allocate $1,260 of that to your down payment savings. The $1,260 will include mortgage principal and interest, real estate taxes, homeowners insurance, and homeowners association (HOA) dues(if any), private mortgage insurance (PMI).

With mortgage rates at about 4.25% this will translate into a mortgage loan amount of about $250,000. The mortgage rate will be based on your credit score, loan program term, debt-to-income ratio and more.

To get the best-priced mortgage deals, you generally want to make a 20% down payment. It’s not a requirement, but that is the ideal. For a 20% down payment on a $250,000 home, you are looking at a $50,000 down payment.

 

Step 2: Decide on when exactly you want to buy a home.

When do you want to buy a home? If you decide you want to buy a home in 3 years from now, you will need to be prepared to save approximately $16,667 per year. That comes out to $1,389 per month. That’s a big chunk for anyone to put aside. You will need to consider cutting out the larger expenses from your budget or finding a way to make more income. You can do the calculation for 5 years or more to save and it may be more realistic for you.

 

Step 3: Take a look at your current budget and make room for savings.

The best way to look at your budget is to create an Excel spreadsheet and type in your income amount at top, list each expense in that column and subtract from your monthly income. This will give you a bottom figure- hopefully showing some money leftover, or breaking at 0.

If you don’t have any money leftover, you will need to take a look at the items that aren’t a necessity- such as eating out all the time, leisurely activities, etc. Take a look at the services you are using for your phone, internet, insurance, etc. and see if you can find a more affordable service elsewhere to cut costs.

Addressing the larger expense items is what will really help you save. If you have a huge car payment, maybe take a look at finding a lower car payment, or even making a one-time payment on a used car. That way, you are freeing up some of your income to set aside in savings.

 

Step 4: Find the best way to save, while also growing your savings at the same time.

Talk to an experienced financial advisor who can advise you on low-risk, long-term savings accounts that grows over time. It would be a real shame to let this amount of money sit in a regular bank savings account without any growth.

If you aren’t already in touch with a good financial advisor, ask your family members and friends for recommendations. You can also look into different companies online, such as Vanguard, T. Rowe Price, etc. and they can advise you on the right type of investment accounts.

 

Step 5: Set up an automated savings plan.

The best way to save money is to set up an automated system. Allocate a percentage or amount that will automatically come out of your paycheck each period and transfer into your savings account or money market account (the same way it would with a 401K contribution).

This way, you don’t see the money and therefore it’s invisible to you. There won’t be the temptation to spend it, because it won’t be in your regular bank account, ready to spend.

Saving for a home is a long process, but well worth the discipline. You will be grateful in the long run to have that bigger down payment because your monthly mortgage payment won’t be so outrageous that you feel you are drowning. Think of this as a dry run for getting you in the routine of saving, because once you are a homeowner, there will be unexpected expenses and repairs related to the house itself.