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Cash Reserves: How Much Money Should You Save When Buying a House?

29 October 2020 No Comment

Buying a home is one of the biggest investments that you’re ever going to make. On average, people are spending a little over $200,000 on houses today.

But obviously, you aren’t going to have to pay cash for a home upfront if you don’t want to do it. You can take out a mortgage on a home and pay for it slowly over time.

You will usually want to have some cash reserves so that you can make a down payment on a house, though. You should save for a house for a few years for the sole purpose of making this down payment.

You may, however, be able to adjust your down payment to be anywhere from just 2 or 3% of the cost of a home all the way up to 20% or more based on a number of factors. Here are some of the factors that’ll determine how much home savings you’ll want to have on hand when purchasing a house.

What Kind of Mortgage Do You Want to Take Out?

When you go to take out a mortgage, you’re going to find that there are a number of different kinds of home loans available. The type that you choose to take out is going to impact how big of a down payment you’ll need to make.

More often than not, traditional home loans will require a 20% down payment. But there are also lots of other types of home loans, like USDA loans, that don’t require much of a down payment at all.

You should learn about the various types of home loans and choose the one that’s going to work best for you. You may want to search for a loan with little to no down payment if you don’t have much in terms of cash reserves right now.

Which Company Do You Want to Take a Mortgage Out Through?

Different mortgage lenders take different approaches to down payments. There are some that are always going to ask for people to put 20% down. There are others that will encourage people to put down way less than that.

If you’re interested in avoiding a down payment, you should attempt to work exclusively with lenders that don’t call for people to put money down when buying homes. It’ll make the mortgage application process simpler for you.

Are You OK With Paying for Private Mortgage Insurance?

No matter which mortgage lender you apply for a home loan through, they’re likely going to ask you to get private mortgage insurance, better known as PMI, if you don’t put 20% down as a down payment when buying a home. You’ll need to think about if that’s OK with you.

PMI won’t always break the bank. But it could add to your monthly expenses for years to come. It might make you think twice about buying a house without putting the full 20% down on it.

Start Getting Your Cash Reserves in Order Prior to Buying a Home

“How much house can I afford?” is a question you should ask when you’re first considering buying a house. You should come up with a budget for yourself and stick to it.

You should base your budget on your income and your expenses as well as any cash reserves that you have. It’ll help guide the way as you look into the possibility of purchasing a home.

Read the other articles on our blog for more useful personal finance advice.

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