Saving for a home

When I tell people they should have a minimum of 20% of the purchase price for a downpayment on a home, they balk. TWENTY PERCENT! How are we ever going to come up with that kind of money?

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Sweat is one way. Cutting back on what you’re spending is another. Here’s the thing about NOT having 20%: You immediately make the home more expensive because you have to incorporate mortgage insurance fees into the equation. On a $210,000 house with only $10,000 down, the mortgage insurance would be 3.1% of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years.

Home ownership is a big responsibility. It’s not just getting into the house; it’s paying the taxes, the utilities, the insurance and the upkeep. An easy way to find the money to save your downpayment is to “practice” living on the reduced cash flow you’ll likely have once you finally do get into a home of your own.

If you’re buying a $250,000 house with 20% down, at 4% amortized over 25 years, your monthly mortgage payment will be $1052.05.

Let’s say the property taxes run at $3000 a year, so that’s $250 a month. And you’ll have to pay house insurance: we’ll estimate at $100 a month. Then there are the utilities, which we’ll estimate at $300 a month. And maintenance: we’ll plan on about $400 a month. For a grand total of $2,102.05 a month, which is what it’ll cost you to actually live in your new home.

Now we come the practice part. Let’s say you’re currently paying $1200 a month rent. You take your housing cost ($2102.05) and subtract your current housing cost ($1200) to come up with your monthly savings: $902.05.

Hey, I’m not talking about if you can THEORETICALLY come up with the money. I’m talking about taking that money and socking it away every single month.

Here’s why you’re going to do it this way:

First, you’ll learn to live on less disposable income. You better start practicing before you buy your home so you’re ready for the adjustment in your lifestyle when you do take the big step. Loads of people buy a home and then keep on spending like they did before they became homeowners … racking up gobs of debt.

Second, the $902.05 a month is going to get you to your 20% downpayment in under five years. In the meantime, you could have friends and family gifting all the stuff you’ll need for your New Home Adventure for all the birthdays and Christmases in between.

So, are you ready to take the dream of home ownership from the I-wish-we-could stage to the I’m-gonna stage?

28 comments on “Saving for a home

  1. I dont think there can be enough articles and info put out there about the real costs of not only buying a home (or condo) but maintaining it to offset the rose coloured glasses, buy, buy, buy messages. Maybe there would be less buyers every year setting themselves up to become house poor.

    BTW another good topic to cover is the strategy of (some) real estate agents, and car sales people actually, to sell the home (or car) even if it's thousands over what their client budgeted for or can afford by using the low monthly payment tactic, i.e. taking the amount that is over budget and re-phrasing it as a "minimal" monthly difference in pyt over the life of the loan…then appeal to the buyers fear by asking "do you really want to give up your home/ car for such a small amount per month?" It's classic. More info needs to put out by those like Gail to remind everyone that too much is too much. For example $15K is still $15K. You're still signing for it and still owe no matter how you want to dress it up.

    Reply

  2. BTW Gail usually advises to budget between 3-5% for maintenance, depending on the age of the house, but in the above example of $400/ mth for a $250,000 home, it comes out to less. Just an observation. I actually agree with her normal numbers for both daily and longterm maintenance.

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  3. I recently posted a blog regarding renting vs. buying in Vancouver comparing my rent vs. a condo listing that was approximately the same size. The reality was without a 20% down payment you are better off continuing to rent and invest the difference, than to take on a 25 year mortgage with a 5% down payment.
    http://www.reisfinancial.ca/1/post/2011/03/rentin

    However, I thought it would be necessary to also compare renting vs. buying with a down payment greater than 20% and the results were very surprising (calculations are included in each blog). Therefore, I created a second part to the original blog:
    http://www.reisfinancial.ca/1/post/2011/03/rentin

    Depending on the housing market, potential home buyers should review their numbers (in great detail) before they commit for 25 – 30 years.

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  4. Has buying real estate ever made sense? Maybe for the 3% – 7% of society who long term see the benefits over interest paid to the bank. However, for the majority of people I agree with the individual above… rent something affordable and invest the difference wisely. Live a debt free life and enjoy the flexibility of not having the banks hands in your pockets for a life time.

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  5. Hello, I just wanted to take the time to make a comment and say I have really enjoyed reading your blog. Thanks for all your work!

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  6. There is noticeably a bundle to know about this. I assume you made certain nice points in features also.

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