The keys to buying a home

You may have many reasons—emotional, functional, financial, or a mix of these. You may view your home as an investment or somewhere to build equity. In fact, it can be an important asset in retirement. About 60% of retirees who relocate do so to cheaper housing markets. And they can typically unlock about $100,000 in home equity when they do.¹ To learn more, check out this Vanguard research.

Owning a home may be a source of pride and accomplishment as your home is somewhere where you feel stability or control. Maybe you plan to spend the rest of your life there. Maybe it’s a place to lay your head for a few years—or decades—until your next move. Maybe your family situation is changing (like you’re getting married, having children, or getting divorced).

It’s understandable to be apprehensive when it comes to buying a home. There’s a lot to consider. Is now the right time to buy? What kind of interest rate can you get on your mortgage now, or what if you wait a year or two? You’ll have to decide what’s right for your situation. Ultimately, you’re looking for something that fulfills your needs and that makes sense financially.

As you get started in the process, it’s important to understand what type of home you want, where you want to live, and what you can afford.

This is a big one. Look at your budget. What would you consider a comfortable monthly mortgage payment? This will help you determine how much you can afford to pay for a house.

There are other costs to consider too, like property taxes and regular housing expenses. For example: The average homeowner spends $1,035 on routine maintenance in a typical year.²

Once you’ve identified your costs, it’s time to start saving. Ultimately, what you spend on your mortgage, property taxes, and other housing costs will depend on your budget and specific circumstances. 

One approach—the 50/30/20 rule—suggests using half your income for living expenses and other bills considered as needs. These are the things you need to pay, such as mortgages, utilities, and health care costs. So all of your housing costs would be included in this half of your budget.

For example: You’ve dedicated half of your income to needs, which includes a mortgage, other housing costs, groceries, day care expenses, and some other costs. So you may decide to spend no more than 30% of your income on housing and 20% on your other needs.

To learn more about the 50/30/20 rule, check out this article.

Location is critical when you’re thinking about affordability. Find out where you’d like to live—not just the state or city, but the neighborhood too. Is it close to your job, your kids’ school, grocery stores, or relatives? Figure out what’s important to you. Your desired location will help you pinpoint the range of home prices. Then research what homes in that area are selling for. Look at local taxes in the area too, since they’ll impact your long-term expenses.

After this review, you may need to reconsider your budget or the area where you’d like to live. And that’s OK. It’s all part of the process.

You’ll probably need a down payment to buy a home. This is money—often a percentage of the home’s total cost—that you pay upfront. Nationally, the average down payment on a primary residence is about 14%.³ (Down payments on investment properties and second homes are generally greater.) The amount you may need will depend on your own circumstances.

You may need private mortgage insurance too, typically if your down payment is less than 20%. This insurance can show up as a monthly cost for you—it protects the lender in case of default.

You’ll want to factor in closing costs too. Keep reading to learn more about them.

You may be able to access your retirement savings for a down payment. But this option may not be advisable if it keeps you from your retirement goals.

Your employer’s retirement plan may allow loans that can help you fund a down payment. Plan loan rates are generally higher than mortgage rates. And there may be other drawbacks. For example: Some plans might stop matching contributions until the loan is paid off. But with plan loans, you pay yourself back, not the mortgage provider. Rules vary by retirement plan, so check your plan document. You should also check with your tax or financial advisor.

You may also be able to withdraw money from an employer’s retirement plan or an IRA to purchase a home. Just keep in mind you may face taxes and penalties if you take money out of these accounts early.⁴ Note: If you’re a qualified first-time homebuyer, you may be able to withdraw up to $10,000 from an IRA for a down payment and not have to pay a 10% penalty tax (you may still owe federal income taxes depending on the type of IRA and the contribution type). You can find more info from the IRS here.

Also, family or friends may help you with a down payment. Just keep in mind that lenders may ask for bank statements from the person who gifted you the money to verify where it came from.

• Interest rate. What you pay to borrow from the lender. It’s a percentage of the amount that you borrowed. Rates are determined by variables like the economy, the length of the loan, and your credit score.
  
• Principal. The amount that you borrow.
• Private mortgage insurance. A type of insurance you might need to buy—typically if your down payment is less than 20%—that protects the lender in the case of default. To learn more about private mortgage insurance, check out this article from the Consumer Financial Protection Bureau.
• Title search. Determines if there are any claims or liens on the property before you buy it. A clean title is often required to complete a real estate transaction.
• Title insurance. Can protect you and the mortgage lender if a title-related problem arises during or after the sale.
• 30-year-mortgage. A common type of mortgage that’s repaid over 30 years.
• 15-year-mortgage. Another common mortgage that’s repaid over 15 years.
• Home renovation loan. Money you borrow to repair or rehab your home. This can include a renovation mortgage loan, which bundles what you pay to purchase the home with the additional renovation costs.
• Home appraisal. A written assessment of the home’s value. It’s recommended you get a home appraisal before purchase.
• Home inspection. An examination of the property that can help identify structural, mechanical, or other issues with the home. It’s recommended you get a home inspection before purchase.

• Fixed. Your interest rate stays the same.
  
• Adjustable. Your interest rate can change over the course of the loan.
• Interest-only. You don’t make payments on the amount that you borrowed—only on the interest—for a period of time.

• Conventional. A mortgage from a private lender.
  
• FHA. A mortgage insured by the Federal Housing Administration. If you qualify, this mortgage usually requires a lower minimum payment than a conventional mortgage.
• Jumbo. A mortgage that has higher loan limits than those set by the Federal Housing Finance Agency.
• VA. A mortgage through the U.S. Department of Veterans Affairs. They’re available to active service members, veterans, and their spouses.
• USDA. A mortgage through the U.S. Department of Agriculture geared to people with low incomes who live in rural areas.

Keep in mind: The terms of your mortgage may include an escrow account for property taxes and insurance. This would bundle your regular mortgage payments with those other costs. When applying for a mortgage, make sure you understand the terms.

Closing costs

You may be required to pay different fees when you buy your home. These may include loan origination, application, attorney, and other fees. And they can get quite pricey. Closing costs can account for 3% to 6% of the purchase price for a typical homeowner.⁵ So if you buy a $400,000 home, you can spend $12,000 to $24,000 in closing costs.

When buying a home, you probably have a lot of things on your mind—from meeting the neighbors to painting the bathrooms a new color. As you begin to enjoy your new home, here are a few things you’ll want to remember:

• Moving costs. Packing up your belongings and having them transported can become costly. The price will depend on how much you’re moving and over how great a distance. A local move costs about $1,250, on average.⁶ A long-distance move can be much more.
• Taxes. You may be eligible for some tax deductions, including mortgage interest. Check with your tax or financial advisor.
  
• HOA dues. If you’re living somewhere with an HOA, you may have to pay dues, sometimes monthly, quarterly, or annually. These dues can increase over time. And they may not be included in your mortgage, so make sure you understand what you’ll be paying and when.