If you’re thinking about buying a home in the near future, you’ve probably thought a good bit about saving for a down payment. Like most people, you may know that it’s important to have cash on hand to put down on your home. This reduces your overall mortgage payment, and when you put down 20 percent of the purchase price, you can also avoid private mortgage insurance.
Having money up front is great, but it’s also important to consider the cash you may need after you purchase a home. Read on for 3 reasons why you shouldn’t use up all your savings on a down payment.
1. You’re Signing Up for More Than a Mortgage
Homeownership has many benefits, but there are also additional costs you need to consider. Property insurance, taxes, homeowner’s association dues, maintenance and more are part of the yearly routine costs associated with owning a home. And if you’ve only rented in the past, you may not have been previously paying for trash collection, water or sewer fees. You should also keep in mind that insurance and property taxes tend to go up every year. It’s important to consider these increases when determining your overall budget and savings plan.
2. An Emergency Fund is Critical
Things happen in life that you can’t predict. An unforeseen financial emergency – like losing a job, a loved one getting sick or a serious car crash – can all have a big impact on your finances. To protect yourself, your home and your financial future, it’s good to have three to six months’ worth of household expenses saved… This includes your house and car payments, insurance, utilities, childcare or education expenses, food and necessities and even unexpected maintenance on your home. It’s not fun to think about worst-case scenarios, but being prepared offers you great peace of mind in difficult times!
3. Maintenance Costs are Real
If you’ve rented in the past, you’ve benefited from your landlord handling household problems – small and large. When you purchase a home, those repairs become your responsibility. A roof leak, trimming trees, a broken dishwasher – these are just a few of things that you need to consider.
Some experts believe that a homeowner should expect to spend 1 percent of their home’s value each year to keep up with general repairs and maintenance. For a home that costs $200,000, that comes out to nearly $170 a month. This isn’t a hard and fast rule, but a general idea of how maintenance costs can impact your budget. It’s one more reason you should have money set aside for the problems that may come up (in addition to your regular recurring expenses).
We know that saving for a down payment on a home can be a daunting task, but the key to financial stability is being prepared. By starting to save right away and not rushing to buy a home that’s at the top of your price range, you’ll be better positioned to live within your means – and ready to handle the unexpected challenges that come your way.