With the housing market in Colorado continuing to heat up, it might be a great time to start thinking about working toward home ownership. For many Coloradans, owning a home is the largest investment of their lifetime; for many more, it’s the longest investment, too. Like any other careful investment, home ownership should be approached with strategic planning. The process can seem daunting (despite what House Hunters might lead you to believe), but thankfully, we’ve got some tips to help. By setting reachable goals, you can be sure to end up in a home you can afford—and even have comfortable savings to maintain it.
The first step along your journey to purchasing a home is to figure out how much you can afford to pay on a monthly basis. Budget experts seem to agree that housing expenses should not exceed more than 28% of your gross monthly income (with taxes, homeowners’ insurance, mortgage insurance, and HOA fees included). With this in mind, calculate the mortgage you’re able to afford, and the length of time you’re willing to amortize the loan. With the median list price of homes in Colorado currently at $390,000, a down payment of 20% may not be a practical option. Luckily, there are many mortgages that will allow for as little as 3.5% cash down, making it possible to afford a home with only $13,650 up front.
Sound simple? Don’t be fooled! To truly prepare for home ownership, you should have a savings account, too; it’s necessary to prepare for things like home repairs/ renovations, moving costs, and home décor. Take it from us: these “unexpected” costs should always be expected.
Saving to buy a home will inevitably require sacrifices elsewhere, so establishing realistic goals can help sustain your enthusiasm for saving, while also keeping your end goal in sight. We all know some months are harder to save than others; however, by establishing goals and anticipating those slower months, you won’t feel like you’re getting behind. Consider the discipline needed to budget for a home purchase as a dry run for home ownership itself!
Because saving for a home is typically a short-term savings plan, low-risk savings tools can be extremely helpful to help you reach your goals quickly. Depending on how much money you have available, there are many different types of savings accounts to consider. Certificate of deposit (CD) and money market accounts are offered by most banks and credit unions, and will provide a higher interest rate of return than standard savings accounts to help you get the most bang for your buck. They also set a limit on how many withdrawals you’re able to make in a month (an added safeguard to make sure your money stays where it’s supposed to—in the bank).
Another useful account is a Roth IRA, which allows you to invest money and then withdraw it tax free. This is especially good for those who are concerned about the tax rate increasing by the time they’re ready to use their savings for a home purchase. By requiring that you pay taxes upfront, a Roth IRA eliminates the risk associated with large sum withdrawals during a period of high interest rates. Currently, up to $5,500 can be contributed to a Roth IRA in a single tax year (for those under the age of 55), and the IRS allows you to withdraw $10,000 penalty free for the purpose of buying a home.
Last, but certainly not least, be sure to take advantage of any payroll deductions your employer offers to set money aside each month. This is a simple way to make the most of saving from each paycheck—even if it’s just incremental.
Use these tips to land your perfect pad, and you’ll be well on your way to becoming a permanent resident of our ever-growing state. Home, sweet home!