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I know that 20% down on a house is a good rule to put as a down payment on a house. What I don't know, however, is how much more is typically a good idea to have beyond that. Since this will factor into the price of the house I should get, it'd be good to know.

What I'm curious about are things like closing costs, the fact that I should still have 6 months of living expenses saved up, how much I should have aside for house repairs that could pop up soon after buying, etc. What are your experiences for money needed BEYOND the 20% down payment in the short-term (~1 year after buying a house)?

This is driven by a fear that I would buy the house, exhausting most of my savings, and then get popped by something I'll need the money for, so any guidance is appreciated. Let's do the math using a $100,000 house with a $20,000 down payment for any examples to keep it easy.

Thanks!

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4 Answers

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In the US you can get a home warranty when you buy a house that will cover major repairs for the first few years of owning a home. The costs vary based on age and the results of the home inspection. Ours cost ~$250 a year. This was put into our closing costs. Unfortunately this market does have some disreputable companies that come im with prices that seem too good to be true. As is usually the case they are. Do research on the company you are getting the home warrenty from to make sure you are dealing with a reputable company that will honor its commitments.

By having 20% down you will avoid needing Mortgage insurance which will save you a considerable amout. My PMI cost me about $70 a month. However once you get to 20% equity in your home the pmi drops off. So if you can put down 15% you should be able to get out from under your pmi in a few years if you want to keep that 5% cushion while making extra payments.

The question is how much do you feel you need. So far owning a 70 year old home my extra maintence costs have been around 2500 a year. But they seem to be in 1k chunks every 4 or 5 months.

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@Chris - home warranty is a must when you buy a house, I personally saved several thousands of dollars because my agent convinced me into buying one, and just as I moved into the house the A/C died on me. –  littleadv Sep 7 '11 at 20:08
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@Littleadv - In the 2 years I had to replace the AC, repair my bedroom ceiling, have the chimney repaired, and had problems in the basement. Total cost > 5k => Warranty $475 –  user4127 Sep 7 '11 at 20:14
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@Chris - I won't contradict Chad or littleadv and everybody is different, but home warranties are something to REALLY WORRY ABOUT. clarkhoward.com/news/clark-howard/homes-real-estate/… Here is some advice saying never pay for one, use an emergency fund instead. –  MrChrister Sep 8 '11 at 2:09
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Also, found this question: money.stackexchange.com/questions/4105/… –  MrChrister Sep 8 '11 at 2:50
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@McChrister - It is a good point. There are reputable firms and they cost more than the fly by night operations. All the time you spend buying a home it makes sense to make sure your insurers are reputable too. –  user4127 Sep 8 '11 at 13:22
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Paying for a good home inspection, from a person you choose. Mine was $500 and the guy gave me a nice print out with a bunch of little problems that I knew had to be fixed. It was easy to determine my fix-up cost, which was separate from my "I want to change this" cost. He was working for me, not the agents or the seller, so I felt more trusting of his advice.

If you end up shopping hard and looking seriously at several houses, you might end up paying this more than once. (A bad report would be a good contingency for cancelling your offer.)

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If the bank will escrow your property tax they may want as much as a full quarter's worth in advance. Closing costs can range from zero to 2% or so of the mortgage. On the $100k house, I'd have $8-10k in a maintenance/repair fund. Much of this will depend on how old the house is and the condition of the systems. Everything powered will fail eventually, the heating/cooling systems, water heater, dishwasher, oven/microwave, fridge, pump if there's well water. All these listed items each have a range of cost depending on size, style, power, etc.

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You should plan on your monthly payment (Principal + Interest + Escrow) being a conservative percentage of your take home pay. No matter your cash savings, if your housing is 60% of your take home pay you are going to have trouble keeping up on the house.

My target for housing is that a 15 year, fixed rate mortgage should be under 25% of my take home pay. For some people, they find that too conservative. I think the exact percent is a risk/reward preference. Some people like the 25% number but look at a 30 year mortgage.

Whatever you do, don't buy a house at the limit of what the bank thinks you can afford :) Historically, they have been more willing for me to spend my money than I have been.

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Most banks can allow monthly payments up to 33% of your total net revenue, as long as the remaining 67% is above 1000 euro (1400 dollar today). Consider that paying 800 dollar a month now might be expensive, but in 20 years will be worth a lot less. –  Konerak Sep 8 '11 at 8:26
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