How to Save for House? | Best tips to get started in Home Ownership
Welcome to your guide on how to plan to save money for a down payment on a purchase of a house. Whether it’s in Anaheim hills, or orange county or anywhere in the USA, it’s the same plan. One of the biggest American dreams is to buy a house, everybody wants to buy a house or most of us want to buy a house. It’s the American dream. One of the richest people in the world are the people who own homes or property. Of course, they also own stocks. But besides that, if you want to just buy a house, you need a plan, you need a strategy and you need a timeline to buy a house. So let’s get right into it. So before we buy a house, we need to know how much you can afford a house. And based on that purchase price, you need to know how much downpayment you are going to need.
So let’s look right into the downpayment and how much payment you are going to need to purchase the type of home that you can afford in the area that you may be looking for. After selling homes for over 25 years. One thing I’ve learned by talking to a lot of people, especially buyers, that they always think they cannot buy a house, it breaks my heart to see that how many people are not buying homes or don’t think about buying homes because they think they cannot buy the house. The number one setback, according to my experience in people not buying a house is that they believe they cannot buy a house. It’s a mindset. And the belief is not that they cannot buy a house, they cannot make the monthly payments. They cannot take care of the house. The belief is they don’t have the money for a down payment. That’s what stop the American dream. Hopefully you’re not one of those person and if you are let’s talk about buying the American dream which starts by collecting your downpayment, saving the downpayment. So a downpayment is one thing when you purchase a home, but there are other things when you buy a house. One is of course the downpayment, whether it’s 5% down or 10% down and we’ll talk about it in the next segment. The other thing is there a closing cost, which is the cost that you need, especially in California, there’s escrow fees, there’s title fees, there’s notary fees, there is homeowners insurance transfer fees, there is property taxes, those are the prepaid. So on top of the closing costs, there are prepaids, which is the property taxes which you may need anywhere from three to six months. And also there is prepaid insurance, fire insurance, a lot of lenders require 12 to 14 months of prepaid insurance, mortgage and fire insurance, then there are reserves, which is some of the lenders want you to have two or three months extra payments, after you close escrow in case something happens in emergency you have money to pay.
So to in order to buy the house here is what you need. The four things you may need. Number one is your down payment, whether it’s 5%, or 10%, or 20%. And we’ll talk about the figures right now. Then there’s a closing cost, which is usually about 3%. In general, then there is a prepaid which includes in that 3% cost, and then these reserves. So let’s look at the numbers. I’m going to give you a breakdown on a $500,000 house. How much is your down payment? How much is the closing cost? How much are your prepaids? And how much are your payments, monthly payments. So before I do that, since you’re watching this, I would really like you to subscribe to my channel if you hear for the first time or if you feel this channel is in or if you feel like this channel is helping you. I put out videos about updates information like this, and home tours, so please subscribe. As you may know, if you’re in Orange County, the median home sales price in Orange County is $900,000, which is quite a bit so let’s say you want to buy a house for $800,000 or $500,000 townhouse.
Let’s go through some numbers so I can explain to you what the closing costs cost are. The down payments are in the prepaids are just to give you a breakdown. And I’m going to put this sheet on your screen so please follow with me on the screen on a $500,000 house if you put 10% down the down payment as it shows on the form here it’s $50,000. And then below that our closing costs it shows you the escrow settlement fee the the lenders title policy, the discount point, which depending on which lender you use, lenders charge anywhere from zero to half to one point on average of the loan amount. In this case, the loan amount is $450,000. So 1 point of that is $4500. So that’s part of your closing cost. So this will increase your closing costs because of the mortgage fees. Then you have processing fees you have home warranty, you have no resigning fees, so all those costs add up to almost $10,000 as you can see in the total closing cost below on the right hand side if you look at the prepaids and impounds you can see that They’re charging five months taxes at let’s say 1.25% property tax that comes out to 20 $600. And they’re estimating 15 months of prepaid insurance, which is about 20 $500. Of course, these are just approximate numbers. Depending on exactly what county you are in which lender you use, these will change. But the numbers are just for an example. So if you look at the payment breakdown, you see that the principal and interest is nine, almost $1900. Your real estate taxes are $520 homeowners insurance is $166. monthly mortgage insurance. This is the insurance if you put less than 20% down so it applies over here. And then I’ve added a Hoa which is the homeowner’s insurance, homeowners association fees, should you buy a house that has association fees there, if the community does not have association fees, you won’t have that. So your total payment is about $3100. In other words, if you buy a townhouse, or two bedrooms, or three bedroom townhouse in Orange County, for $500,000, you only need a total of $10,000 in closing costs $50,000 in downpayment and about $6800, in prepaids, which brings it to $66,000, approximately, of course, I said only. So in a way it is a lot of money. But on the other sense when it comes to a purchase price, you don’t need a $500,000 to purchase a home, you just need $66,000 In this example, and also in this example, because the cost is $66,000 total, including the downpayment, the closing costs, and prepaids, approximately is about 3%.
Let’s look at this example for $800,000. And I’m going to put this sheet on the screen here. So if you buy a house in Orange County, or anywhere for $800,000, and if you put 10% down, you have a down payment that’s required of about $80,000. And assuming you have an interest rate of 3%. We’ll talk about your payment at the end closing cost at the bottom. Again, escrow title, origination fees, which is the mortgage fees, underwriting fees, appraisal notary and miscellaneous fees comes out to $13,000 pre pays on your right hand side. In this case, it’s three months of taxes, and the amount of tax you pay varies on when you buy the home, whether it’s March or April or October, because taxes at least in California, Orange County, you pay every six months in June, November and April. So again, if you look at the payment breakdown, you see that your monthly payment is $5300, approximately $5359.97 on an $800,000 house with a 3% interest rate and your total cost. ABC, which is the down payment closing costs and prepaids is $103,000. Mind you this does not include the reserves, because that’s not required, but all the lenders and then also keep in mind that you also need after you buy the house, you’re going to need moving cost when you move into the house, you may want to change the tiles or buy some furniture by cable and have deposits for utilities. So you may need an additional $20,000 on top of your closing costs and down payment for you to purchase a home. Now that seems like a lot of money. And it is a lot of money, but it’s doable. So let’s talk about how you can save money for your down payment for your dream home. So let’s come up with an example of a $500,000 house. Let’s say you want to buy something in Orange County, a townhouse or a house, you may not get a house for 500,000 but at least a nice townhouse or a condo for $500,000. And let’s say you would like to put 10% down on a house purchase. Of course you can buy with an FHA loan, which is the Federal Housing Authority loan, you only need three and a half percent down. In other words, you can buy a $500,000 house with only $15,000 downpayment plus your closing cost and your prepaids. So pretty close to $20,000, you could buy a house. So for this example on a $500,000 house, assuming we put 10% down, you’re going to come up with $50,000 or that’s what you are going to need. Now let’s assume you don’t have this money. So how do you plan to save? Well, let’s look at this assuming that you have the closing cost and you’re going to borrow some money from your friends or family or you have some 401k that you can use towards your primary home. Let’s assume that you already had the closing costs and prepaids for this example so we are looking at $500,000 you don’t have that and you’d like to save up for approximately $500,000 house. So what is the savings plan? First of all, you have to have a plan to save up that downpayment, whether it’s one year, six months, two years. So let’s look an example. If you want to buy let’s say a house in five years and you want to save $50,000 how much of savings Do you need to make every month? Well, in five years down the road you need to save $1,000 a month so that you have $50,000 in five years. If you want to buy it in three years. If you say $1400 a month you will have in three years $50,000 down payment, if you want to buy in two years, you can save $2100 a month. And if you want to buy a house in just one year and you want to save up for a down payment, then you need to save$4166 a month to get to buy your dream home, assuming it’s a $500,000. So if you break down the numbers, it’s quite doable. Now it may seem very difficult, oh my gosh, how I’m going to save $1,000 a month or $3,000 a month? Well, assuming you’re married, or two sisters are buying together or two brothers are buying together or two friends are buying together, it’s $500 each that you can save so you can save up $50,000 or is 2000 each. So it’s quite doable. If you have a plan that you can sit down and work out. And you’re welcome to shoot me an email and I can come up with a plan to help you start saving.
So saving is one thing. But the biggest thing to come up with a downpayment and purchase a home is to have a plan to stop the bleeding of your expenses. Wow, what is that? What do I mean by bleeding of expenses? Well, when you buy a house, you must have a certain expenses, and you must have a certain debt ratio. So that means if the more expenses that you cut the on your monthly monthly expenses, the more house you can buy the second plan, which is to save money by cutting back your expenses. Where can we cut expenses? Well, let’s look at several options. And of course, like I said, this could be on your own, or if you’re married, or if you’re partners, you can double it up. Or you can save one salary for down payment, and you can survive on one salary. So here are some of the things you can do to cut your expenses. That’s the first step, then comes the savings. Now to do that, like I mentioned earlier, you must have a plan to cut your expenses and to start saving. Now to have that plan, you must have a mindset to start saving if you don’t have the mindset to save, and don’t have a plan to cut back your expenses, you’re never going to save. As I mentioned earlier, a lot of the buyers that I’ve talked to, they don’t think they can buy because they don’t have the belief in the mindset to buy and the hurdle is the down payment.
So assuming you have the mindset to buy, and you really want to buy a house, here’s the things where you can cut back number one thing is you can cut back on your lifestyle, we all want to go to Starbucks, we all want premium channels, streaming channels, so all those you can cut back 50 bucks here or 50 bucks there. 30 bucks over there. If you’re planning on buying a car, which you need to go to work, maybe you don’t want to buy a Mercedes or a expensive car, buy a low budget car for now. And later on you can get it so the$ 2300 a month payment that you saving on your car, you can put it towards your savings. Or maybe you’re renting and you want to buy some appliances, you need a new computer, a new phone, new gadgets, all those you can cut back or buy used so you can start saving. The other thing you can do again this is a mindset is that if you think 500,000 is too much to buy a house or 800,000 is too much to buy a house settle for a $40,000 condo, lower your price, lower your down payment. So you increase your probability of buying something. This all has to do with mindset. The other thing that you can help yourself is you might say well homes expensive. As I mentioned earlier, Orange County, the median home price is $90,000. Of course, if you’re thinking of going to Newport Beach, or Irvine, or some expensive areas, maybe you want to stay where you live and buy a house there is your first home. I remember 25 years ago, I bought my first condo, it was 1 to 1.5 bedrooms, one and a half bath in the city of Anaheim. I’ll always want to go to Irvine. But let alone Irvine, I could not even afford the $120,000 house. My lender said that this was the maximum, this was quite a while ago. So I bought two my means I didn’t really want a two bedroom condo with one and a half bath. But I bought it and I lived in it for five years, sold it and bought a house in Anaheim hills.
So you progress. The key is to get your down payment, get into a house and then move up. So don’t get stuck on buying a house in a certain city at a certain price range by where you can afford and get started. Time is of the essence. Because the earlier you start, the sooner you pay off the 30 year mortgage. So the key is why now whether you’re 20 years old, 30 years old, 40 years old, by the time you’re 50, 60, 70, you want to pay off that house. So when you retire, you don’t have any payments, or you can pay off early and use that equity to buy other properties and become rich that way. By the way talking about mindset. What I’m saying is to buy a house you have to become frugal, really frugal, richest people in the world own property. They are homeowners they’re property owners. If you haven’t read the book, The Millionaire Next Door I read it 10 years ago, and there’s three things they talk about what millionaires are one of the things that they are frugal obviously, but the actual Average millionaire, wears his old suit. He doesn’t buy a suit every year. He’s still sitting in the same house that he bought 15 years ago. Look at Warren Buffet, a billionaire. And until a few years back, he lived in the same house that he bought four years ago and draw the same pickup. The thing that I’m trying to say is that, to change your mindset to have that action plan, you have to change your thoughts. You have to become frugal, assuming that you are not struggling but trying to save money. If you have the money. If you’re going to somebody is going to give you the money and you’re going to inherit the money. You don’t have to change your lifestyle, go for it. Take the 50,000 go buy a house. But if you’re not in that situation, start saving, have the mindset and keep going. Let us know when you plan on buying a house or what you plan to start saving or if you have any challenges that you’re having to start saving. Hopefully your mindset is not stopping you from buying a home. It’s usually the downpayment that stops people from buying the home. So be different be a homeowner, start soon.