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Saving for a New Home
Most likely, purchasing a home is a short-term goal. If your planned purchase is 5 years or less in the future, use Savings Accounts, Money Market funds and CDs.

If it is a little further out, like a vacation home in 10 years. You may consider using Vanguard’s conservative or moderate growth LifeStrategy Funds.

  • Remember to reduce risk by moving to the more conservative LifeStrategy Fund over time.
  • When the purchase is 5 years or so away, transition the assets to savings, money markets and CDs. If you don’t, and the market declines you may have to postpone this goal.

Other suggestions:

  • We recommend spending no more than 25% of your gross income on your monthly house payment. This includes: principal, interest, property taxes, homeowner’s insurance as well as any homeowner’s association or condo fees.

NOTE: They will be happy to lend you more because they know you will eat peanut butter and jelly in order to make your mortgage payment.
  • If you are spending less on rent, try to save the difference between that 25% and your rent in order to get used to what this payment feels like. If it is difficult, you may want to spend less. If not, you may be able to take on a little more.
  • It’s true that homeowner’s get tax relief by itemizing home mortgage interest paid and property taxes on their tax returns. But not every homeowner pays enough to itemize. And home maintenance can gobble up these dollars.
  • Depending on your home’s age and state of renovation, it is recommended that you budget 1-4% of your home’s purchase price annually for maintenance. Big expenses don’t come up every year, but they will arise. Windows, roofs, hot water heaters, appliances etc. need to be replaced.  Be sure to include this in your budget.
  • Don’t let your down payment drain your Emergency Fund. If you can’t keep 6 months in reserve AND make the down payment, consider paying little or nothing down on your home. This is contrary to what many may tell you. Save the cash reserves you otherwise would have put down in your Emergency fund. Should you lose your job or face another crisis, you will be able to continue to make your mortgage payments. Without 20% equity, you will pay for private mortgage insurance or a pre-funding premium on a VA loan. That is the opportunity cost for preserving liquidity.
  • Pay off your home before you retire.  Those who retire with mortgages do not enjoy the same peace of mind as those whose homes are paid off.

Remember, life changes. Babies come with day care expenses. Part time jobs can be lost. Consider any planned life changes that will have a big impact on your budget in determining what you can afford.

 

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