You just finished watching the latest installment of House Hunters on HGTV and begin to think to yourself, “Why not me”? Shouldn’t I be able to get that home will the beautiful kitchen, sweet master bedroom, and super-duper outdoor living space? Before you go ahead with that first home purchase, there are three “Ted” rules you need to consider for your family finances.
The 20% rule.
I am a big fan of putting down 20% for two reasons One, If you are renting and you can save a larger amount each month to build up a cash reserve of a 20% down payment, it is a good sign that you are ready to afford the future mortgage payment. Often, people skip right from renting to owning by putting down a small down payment and then get caught upside down with the extra costs of owning a home (higher electric, gas, landscaping, etc.) Two, in most cases, you will avoid paying the private mortgage insurance (PMI) which increase your monthly payment in the range of $50 to $200 depending on the size of the loan. Far too often, new home buyers stretch themselves by making a lower down payment, not recognizing how these extra costs will affect them when they get in the home.
The 10% rule.
It has been my experience that when people purchase a new home they tell themselves that they have a year to fix up the home. However, after they start watching a few more HGTV shows and make a few trips to Home Depot, they find themselves quickly craving to make renovations or buy new furniture. So plan that about 10% of the home’s purchase price may be needed for home improvements and furniture in the first year. For a $300,000 house, that’s $30,000.
The 1% rule.
If the home is valued at $300,000, you should set aside a kitty of 1% for the unexpected. I couldn’t tell you today if it will be the roof, the water heater or the cooling and heating system. But invariably there are going to be year-to-year blow ups that will cost you money from your savings.
Don’t forget that the television shows which glamorize new homes and fixer uppers never include labor cost in their numbers when they make new additions to a home. So, when you see it on television you should double your cost to do it at home. Plan for the 20/10/1 rule and you’ll make a much smoother transition with your money from renting to owning.