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It can take a lot of work to save up to buy your first home, and you shouldn't stop when you've stashed away enough for a down payment.
That's the advice of Washington, D.C.-based financial planner Alicia R. Hudnett Reiss, CFP, who often works with first-time homebuyers in their 20s, 30s and 40s.
She sees it all the time: Disciplined clients scrimp and save enough cash for a 20% down payment, but they make the mistake of dipping into these savings to cover the unexpected costs of buying a new house.
And that's understandable. A 20% down payment can be a considerable amount of money. Once you hit that number, it feels like crossing the finish line. But there are other costs to consider before you get the keys to your new home.
"People just think the down payment is going to be X amount, when really they need to think about how much the whole process is going to cost," Hudnett Reiss tells CNBC Select.
If you're in the market for a new place to live, Hudnett Reiss suggests stashing money aside for the less-talked-about costs of home ownership before you apply for a mortgage.
Here are the savings buckets she recommends.
To be prepared for the home-buying process, you'll need a plan to pay for closing costs and other fees.
Closing costs vary depending on where you're buying a home, but they include the miscellaneous costs that come with getting your mortgage and transferring legal ownership from one party to the next. This might include attorney fees, escrow fees, loan origination fees, title insurance, property tax and your first yearly homeowners insurance premium. Sometimes, the costs for your home inspection and appraisal are wrapped up into closing fees, too.
According to the real estate site Zillow, closing costs can range from 2 to 5% of your home's purchase price. You should have at least this much set aside, in addition to your down payment fund, to play it safe.
To get a better idea of what's ahead, ask your real estate agent what costs you can expect in your state or locality. Keep in mind that sometimes, you can negotiate with the seller to split the costs, while other times the buyer is fully on the hook.
You could always use some cash from your down payment fund to cover closing costs, but be sure to calculate how a smaller down payment will impact your mortgage, then weigh the pros and cons. Usually, a higher down payment means better interest rates as well as a lower monthly payment.
"The down payment actually puts equity in the home, whereas the fees are just gone," says Hudnett Reiss.
If paying for closing costs up front is not an option, you may be able to roll them into the amount you finance with your mortgage, says Hudnett Reiss. But then you will have to pay interest on those costs, which increases the overall amount that you're spending.
"As soon as you move in, be prepared for something to come up and for there to be additional expenses," says Hudnett Reiss.
Move-in costs entail the mundane purchases like paint for touch-ups or wood glue to repair furniture nicks. But you'll also want to set aside the necessary funds to buy the kind of rugs, couches, shelves, window treatments and other furnishings that you want to make your new space feel like home.
Of course, you have some flexibility in this area. Each homeowner decides for themselves which expenses they can put on the back burner until money is not so tight. For instance, you may be willing to use hand-me-down furniture from friends or family or make do with furnishings from your old home.
However, some move-in costs may be unavoidable, such as utility deposits, service activation fees for internet and cable and other essentials.
Keep in mind that becoming a new home owner means you could face big emergency costs in the future.
"Certainly when you go into a home, you want to make sure your emergency fund is full, or maybe even increased," says Hudnett Reiss. "With a home there are more chances for costs to come up, such as a leaky roof or a broken water heater."
When you rent, you might be fine with just a few months' worth of expenses, argues Hudnett Reiss, but new homeowners should think about padding their emergency fund now that they have more responsibilities.
The Ally Online Savings Account is a good choice for keeping track of multiple buckets or savings funds all within the same account.
Account holders can organize their saving goals by creating up to 10 different savings categories/funds. For example, you can create a designated fund for a "Down Payment" and another for "Closing Costs," making it easy to keep track.
Annual Percentage Yield (APY)
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Excessive transactions fee
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Ally account holders can enjoy even more benefits if they also have an Ally checking account.
Ally Bank account holders have access to over 43,000 fee-free Allpoint ATMs, but you can also be reimbursed up to $10 per statement cycle for fees charged at out-of-network ATMs nationwide.
Monthly maintenance fee
Minimum deposit to open
Annual Percentage Yield (APY)
0.10% less than $15,000 minimum daily balance; 0.25% over $15,000 minimum daily balance
Free ATM network
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Up to $10 per statement cycle
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Information about the Ally Online Savings Account and Ally Interest Checking Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.
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