In case you missed the previous steps in my How To Buy Your First Home series:
Read on, and if you have any questions, let’s grab a coffee (or iced tea if you’re like me and don’t drink coffee) and we can gab about the process of buying your first home.
Step 4: Gather The Funds Needed To Buy Your New Home
If you’re like most future first time home buyers, the idea of needing to save up money for your deposit, down payment, land transfer tax, and legal fees can seem really daunting. That’s why it is ideal to start saving as early as possible. Even though you might not be looking to buy a home for another 2 years, stashing away money now can help make the process of handing over so much cash a little more manageable. But remember, you get your first home in exchange for that big pile of cash so it’s not a bad thing!
Practice paying for your future home now
Why not start saving for your first home by pretending you’re already a home owner? Open a savings account and every month practice being a home owner by transferring the amount you will one day be paying towards your mortgage and utilities into that account. Get used to the feeling of living off of what you have left after your pretend house expenses have been paid every month and make sure that is something you are comfortable with. Finding it’s too tight on your pocketbook? Maybe you need to consider a home in a lower price point, cutting back on other spending, or pushing for that pay increase at work.
(I recognize this is hard to do if you are already paying rent somewhere but do your best to stash away as much money as possible. If you’re living at home with Mom and Dad rent free, practicing making payments like a home owner is a great way to prepare for what your financial life will look like when you’re a proud new home owner.)
Your monthly costs as a home owner
Being a home owner is awesome, but it also comes with monthly costs that you are responsible for.
Below is an estimate of monthly costs for a $400,000 home.
- Mortgage payment: You’ve made a 5% ($20,000) down payment on your home purchase of $400,000 so your mortgage is for $380,000. With a 25 year amortization, 5 year fixed rate mortgage with 4% interest, your mortgage payments would be $947 biweekly, or $2,054 monthly. This amount includes the mortgage insurance premium payment as well. To play around with mortgage payments for different amortizations, interest rates, and payment frequencies check out RateHub’s Mortgage Payment calculator.
- Condo maintenance fees: Depending on the location and age of the building/complex, your monthly condo fees can be as low as $50 and as high as $900 for example. For some condo buildings, your utilities are included in the maintenance fees, whereas others do not include your utilities. Generally for townhouse complexes, your condo fees cover the cost of lawn maintenance, snow removal, and sometimes water. But generally you pay all your own utilities in condo townhome complexes. I can give you a better indication of what you should budget for condo fees once I know where and what you are looking to buy.
- Property insurance: Property insurance differs depending on the type of home you are purchasing. A condo apartment can be $25 a month while a detached home can be a couple hundred a month.
- Utilities: Your utilities will vary depending on size of home, how energy efficient it is, and whether you like to take 30 minute piping hot showers or not. You will need to account for paying heat, hydro, gas, and water. Additional utilities like cable, internet, home phone, and alarm system should also be added in to your expenses if you want them.
- Property taxes: Property taxes vary significantly. Depending on the price range and location you are looking at, I can give you a better idea of what you should budget for this. As a rough estimate, budget for 1% of the purchase price for annual property taxes, but again this is a rough estimate.
- Maintenance of a home: As a home owner you will have ongoing basic maintenance expenses, such as replacing old windows, re-shingling the roof, replacing the old furnace and air conditioner, lawn care, hiring a service man when your fridge breaks down, etc. While these expenses are generally spread out over time, they do add up. Also, include any costs you will want to spend when you move in to help make it feel like home. Do you want to paint the living room, put up new light fixtures, put in a granite counter top, replace the flooring, renovate the kitchen, finish the basement? Add up these costs and develop a plan of action. Decide what you want to do right away, and what can wait for a later date.
Have a generous family member?
Don’t you love it when family members offer to give you a loan, or even better a straight up cash gift, to help fund your new home purchase? If you’re lucky enough to have this be your situation, make sure to mention this to your mortgage professional as they may require a gift letter to be signed by the generous donor prior to your mortgage approval.
Up next - Step 5: Pick Your Side Kick
Do you have questions about the home buying process? That's what I'm here for! Drop me an e-mail or give me a call and I'd be happy to help.