Saving for a home

By Gail Vaz-Oxlade on March 28, 2011
Estimated reading time: 2 minutes

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?

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?