No matter your age, buying a home is a huge decision.
How Much Should I Spend on My First Home?
The first step of homebuying is determining how much home you can afford. These tips help you find that magic number.
Andrew Gerber | Relationship Manager
First Republic Bank
4 min read
Buying your first home is an exciting and exhilarating endeavor — and millennials are leading the way when it comes to making this big purchase. According to the National Association of Realtors, buyers 36 years old and younger made up the largest share of homebuyers in 2016 at 34%.
From location and number of bedrooms to parking and HOA fees, there are numerous factors to consider — both financial and personal — when it comes to taking the plunge into homeownership. Before you start looking at potential homes, there is one thing you’ll need to figure out first: how much you can actually afford to spend on your home. The following are some guidelines to help you reach that magic number.
Tip No. 1: Establish your monthly budget
Determining how much you can realistically afford to spend on your mortgage takes more than simply looking at your current rent payment and engaging in a bit of extrapolation. There are other expenses — including utility bills, homeowner’s insurance, maintenance costs, repairs, property taxes, HOA fees and water bills — that you’ll need to factor in as you work out a monthly mortgage budget that won’t break the bank and will leave room for other important short- and long-term financial goals.
Tip No. 2: Don’t skimp on your down payment
You’ll want to keep your potential home in a price range that allows you to make a down payment of at least 20%. Why? If you put down less than 20%, you’ll likely have to pay for private mortgage insurance (PMI) at a rate of approximately 0.15% to 0.25% of the loan amount — and that’s on top of your mortgage interest rate. If you’re close to that number, taking a little bit longer to save more of your salary — along with any raises, bonuses, gifts, side hustle money and proceeds from CDs or savings accounts — is like giving your future self a pile of cash.
Don’t forget to factor in closing costs as well: Your realtor will help you better gauge exactly how much you can expect to spend, but homebuyers typically pay anywhere from 2% to 5% of the purchase price of their home.
Tip No. 3: Location matters
First-time homebuyers looking to purchase a home in major, high-demand cities such as New York, San Francisco or Boston should expect to pay a premium. Accordingly, that 20% down payment becomes all the more important and you’ll want to give yourself even more time to save. Research up-and-coming neighborhoods to see if good deals can still be found amidst rising prices. Look for fixer-uppers in already established areas. If you’d prefer to skip straight ahead to your dream house, however, now might be the perfect moment to chase that promotion or ask for a raise — you never know!
Closing in on your dream home
If you budget properly, buying a home is a great way to build up equity, diversify your portfolio and set yourself up for future success. If you still need a little help sorting out the details, check in with a seasoned financial advisor who can make recommendations based on your financial profile and goals.
The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. First Republic does not provide tax or legal advice. We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained here. This information is governed by our Terms and Conditions of Use.