Down payment and beyond: Saving for your first house

With warmer days approaching, "For Sale" signs are replacing holiday decorations in front of many homes. And if you've never owned a home, all those signs may lead you to wonder whether this is the year you should finally take the plunge and buy a property.

If this is your year to buy -- or even if you're figuring out whether it's better to rent or buy -- you probably know there are expenses you should expect when buying a home. Others, however, may take you by surprise. So take steps now to prepare your savings account for home ownership.

Save for a big down payment

One of the most common savings goals is saving for a down payment on a home. While programs exist to allow strapped home buyers to put very little into a down payment, you'll reap some benefits from having at least 20 percent of your new home's purchase price.

These benefits include:

1. Avoiding PMI. A bigger down payment will allow you to avoid private mortgage insurance, commonly called PMI, which protects the lender if a borrower defaults on payments. Don't dismiss PMI as a small bill; for a median-priced home, you'll pay $50 to $100 a month for the coverage, according to the Mortgage Insurance Companies of America. (A median-priced home today is just under $200,000.)

Moreover, you'll pay that amount until you've paid off a big chunk of the loan -- usually after earning 22 percent equity, a figure established by federal law. So that extra bill could be dinging you for years, eventually costing you thousands of dollars.

2. Protecting yourself from fluctuating home values. Recent tumultuous years for home prices highlight another reason to aim for a 20 percent down payment. Fluctuating home prices may mean you'll have periods in which your home's value increases mixed with others when the value goes down. Much of the anguish home buyers have felt recently has resulted from discovering that their homes were worth less than their mortgage balances.

Where should you stash your down payment savings? Because you'll want the money quickly with little exposure to risk, look to online savings accounts with high interest rates or consider a money market account. Both will keep your principle accessible in case of an emergency.

And now: Add stuff

So say you've bought a house -- signed on the dotted line and handed over the biggest cashier's check of your life. You'll now likely fight an internal battle trying not to go broke doing, and buying, everything you want for your house. Whether it's fresh paint on the walls, guest room furniture or a kitchen makeover -- and whether the expense is $10 or or $10,000 -- it's hard not to want to do it immediately.

Setting goals for your house and a schedule to complete them is critical to keep from whittling away the rest of your savings -- or going into debt -- to make your house a home.

Consider targeted savings accounts, labeled with your goals, to keep you on track when spending money. A "Guest Room" or "New Kitchen" targeted account will let you identify a savings goal and add to it incrementally, keeping your home's expenses from turning into a nightmare.

Saving for a rainy day … and a hole in the roof

If you know homeowners -- family, friends, coworkers -- you no doubt have spent a bit of time listening to the homeowner's lament. Do any of these sound familiar?

• Returning from vacation to discover the air conditioner stopped working
• Diagnosing a hole in the roof -- from the large wet spot in the ceiling
• Being trapped in the garage by a broken automatic door opener

Apartment-dwellers hear these stories with a shrug; homeowners feel a sympathetic chill travel down their spines. For every garage-door-opener repair that surprisingly only costs $75, you'll have a water-heater repair that … well, $1,000 later, you have a new water heater. (And imagine the joys of cold showers and hand-washed dishes while you're waiting for its delivery.)

Home Buying for Dummies by Eric Tyson and Ray Brown offers this suggestion: Budget 1 percent of the purchase price of your home annually for maintenance. So, that $200,000 median-priced home? Expect $2,000 in maintenance costs annually, or $166 per month.

So should repair costs come out of your emergency fund -- the one you keep in a high-interest savings or money market account so it's readily accessible? It depends. Some may say that home repairs are what an emergency fund is intended for. However, if you have a water heater with a projected eight-to-10-year lifespan, and you're on year 7, saving explicitly to replace the appliance could be a prudent move. (Tempted to do a home project yourself? Be sure to calculate the real costs of DIY.)

The down payment is just the beginning of expenses a hopeful homeowner needs to save for. Remember that your savings obligations don't end once the home is bought and you'll be in a good position to take care of your home for years to come.

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