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You just finished watching the latest installment of House Hunters on HGTV and begin to think to yourself why not me? Purchasing your first home is not only the American Dream, for many young Americans it signifies a real transition into financial adulthood and responsibility taking on potentially the largest debt you will ever carry in your entire life. If you are going to buy a new home, there are three financial rules you should consider before you sign on the dotted line.
The 20% Rule
I am a big fan of putting down 20% for two reasons. One, by saving this 20% it will put you more into a forced habit of what you can save monthly which will likely indicate that you are ready to take on the new mortgage payment coming up with the home purchase. Two, in most cases, you will avoid paying the Private Mortgage Insurance (PMI) which can make your monthly payment more expensive at the time you purchase the first home. Far too often, new homebuyers stretch themselves by making a lower down payment, not recognizing how these extra costs will affect them.
The 10% Rule
It’s been my experience that when you purchase a new home you will tell yourself that you have your whole life to fix up the home. However, after you start watching a few more HGTV shows and make a few trips to Home Depot, you’ll find yourself craving to make some renovations or buy some new furniture. Beyond the down payment you need to save, plan that about 10% of the home value (i.e. a home at $300,000) will cost you an additional $30,000 in home improvements and furniture in the first year.
The 1% Rule
Beyond your mortgage payment, you should plan that if the home is valued at $300,000, you should set aside a kiddie of 1% to plan for the unexpected. I couldn’t tell you today if it will be the roof, the water heater, or the A/C, but invariably there are going to be year to year blow ups that will cost you money from your savings.