Saving for your first home can feel like a daunting task. With rising prices and the many costs associated with homeownership, it’s easy to get overwhelmed by the idea of setting aside enough money. But despite the challenges, buying a home remains one of the most valuable investments you can make. Homes typically appreciate over time, offering financial stability and long-term equity growth. In fact, homeownership can be more stable than many other investments, like corporate stocks, especially in the long run.
Unexpected costs to prepare for when buying your first home
Buying a home is more than just the down payment. Here are the costs you’ll need to factor into your savings plan.
- Closing Costs: Expect these to be about 2-6% of your home’s purchase price. For example, on a $450,000 home, this means you might pay between $9,000 and $27,000. These costs include appraisal fees, title insurance, and other processing fees. Keep in mind that you can cut costs by avoiding lender fees (which we at Tomo Mortgage don’t charge, which can save you some money).
- Home Inspection Issues: A home inspection might reveal hidden problems like outdated wiring or a leaky roof. Repair costs can range from a few hundred dollars to several thousand, depending on the issue’s severity. For instance, replacing an old HVAC system could set you back $5,000 to $10,000. Sometimes you’ll ask the seller to cover these costs (i.e., they’ll cut you a check at closing to cover these immediate expenses), but that’s not always the case. If you empty your bank account to buy the house and then have a boiler issue in the first few months, you might need to come up with some emergency cash quickly. Finding a home with relatively new appliances and roofing can help you avoid these issues.
- Property Taxes and Insurance: These can be higher than you anticipate. Property taxes vary by location and can be significant. Homeowners insurance premiums also depend on factors like the home’s condition and location. Budget for these annually, and be prepared for fluctuations in costs.
Property tax rates typically range from 0.5% to 2.5% of the home’s assessed value, though it can vary greatly by state and locality. Here’s an example for different home values:
- For a $250,000 home: Property taxes could range from $1,250 to $6,250 annually.
- For a $500,000 home: Property taxes could range from $2,500 to $12,500 annually.
- For a $1,000,000 home: Property taxes could range from $5,000 to $25,000 annually
High-tax areas like parts of New Jersey or Illinois will be at the upper end of this range, while states like Texas, Florida, or Colorado might be lower.
A common rule of thumb is that homeowners insurance typically costs 0.2% to 0.5% of the home’s value annually, though this can vary based on location, coverage, and risk factors.
- For a home valued at $250,000: Insurance could cost between $800 to $1,500 annually.
- For a home valued at $500,000: Insurance could cost between $1,500 to $2,500 annually.
- For a home valued at $1,000,000: Insurance could cost between $2,500 to $4,500 annually.
- Home Repairs and Maintenance: You’ll need to budget around 1% to 4% of your home’s value each year for maintenance. For a $300,000 home, that’s approximately $3,000 to $12,000 annually. This includes everything from minor fixes to major repairs like roofing or plumbing. Think about this as part of the cost of owning the home—if you think you can afford $4,000 per month on housing, that could mean your mortgage is $3,500 and your “repair savings” might be another $500 per month.
- Utilities and Service Upgrades: Moving into a new home might mean higher utility bills or the need for service upgrades. For example, if the home has outdated insulation, you might face higher energy costs or need to invest in new insulation. A seller will usually have ballpark costs for utilities that you can use to factor into your overall budget, but if you’re just trying to figure out how much you can afford (and how much you need to save) there are things you can do.
- First, getting a home energy audit—often free or low-cost through your utility company—can help you identify energy efficiency improvements like better insulation or fixing drafts. You should also ask the seller for the last 12 months of utility bills to get a realistic idea of what you’ll be paying. If the home is older, budget for necessary efficiency upgrades, such as new insulation or an HVAC system, which can lower monthly bills and potentially qualify for rebates or incentives.
- Moving Costs: Don’t forget about moving expenses. Depending on the distance and amount of stuff, moving can cost anywhere from a few hundred dollars to several thousand. Hiring movers or renting a truck, plus buying supplies, can add up quickly.
- Reserve Funds: When you’re gearing up to buy a home, having a solid emergency fund is crucial. You want to be prepared for any surprises that pop up, whether it’s a roof leak or unexpected medical bills. A good rule of thumb is to set aside six months of mortgage payments. That gives you a cushion to ride out any financial bumps without stressing about losing your home.
- You can tap into different sources to build this fund—think savings accounts, brokerage accounts, or even part of your 401(k). But, be cautious about using your 401(k) unless you really have to, as there are penalties for early withdrawals and it can hit your retirement plans hard in the long run. Instead, focus on putting together liquid savings you can access quickly. This helps you weather storms like job loss or sudden expenses without scrambling for funds.
So, what’s the total: How much should I budget for a new house?
To manage these surprises, consider the following:
| Home Price | $250,000 | $500,000 | $750,000 |
| Down Payment (usually 5%) | $12,500 | $25,000 | $37,500 |
| Closing Costs (usually 3%) | $7,500 | $15,000 | $22,500 |
| Emergency Funds (about 6 months of payments at 6% interest rate) | $12,000 (mortgage estimated at $2,000) | $24,000 (mortgage estimated at $4,000) | $36,000 (mortgage estimated at $6,000) |
| Moving Costs (can vary greatly depending on if you have friends or movers help, and where you are moving from) | $500~ | $700~ | $1,000~ |
| Total: How much you need to save | $30,000~ | $59,700~ | $98,000~ |
What costs do first-time buyers often overlook?
Here are some frequently overlooked costs:
- Homeowner Association (HOA) Fees: If your new home is in an HOA community, fees can range from $100 to $500 per month.
- Escrow Payments: These are upfront payments for things like property taxes and insurance, typically required to be deposited into an escrow account. If your offer falls through, these funds will be returned to you.
- Earnest Money: This deposit (usually 1% to 3% of the home’s price) shows you’re serious about buying. For example, on a $400,000 home, this could be $4,000 to $12,000.
Can I buy a home with no money down?
0% down payment options are rare but available in some cases:
- VA Loans: For military service members and their families, VA loans offer 0% down payment options.
- USDA Loans: These are available for rural areas and also offer 0% down.
If these don’t apply, explore down payment assistance programs specific to your location.
What are some practical tips for saving money to cover these costs?
Saving for a home can be challenging, but here are some everyday ways to boost your savings:
- Set your savings target, and work backward. Knowing how much you need to save can really help make all the right choices throughout the year. But don’t set an unrealistic target—saving for 10+ years for a perfect home will never work. Try to set a target for owning in 3 years, max, and see where that’ll get you.
- Examine your monthly expenses and make cuts—maybe it’s dining out or a gym membership. Review subscription services and cut those you don’t really use or need. But don’t set unrealistic goals that you can’t keep. It’s kinda like dieting—a plan that you can’t stick with in the long term probably won’t help a whole lot.
- Get more income. Maybe it’s time to ask for a raise or look for a role elsewhere, but squeezing a budget will really only get you so far.
By budgeting for these unexpected costs and incorporating these saving strategies, you can put money aside for some of these unexpected costs. Being financially prepared will help you enjoy your new home without the stress of unexpected expenses.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.