how much to save for a home

Buying a home is nerve-wracking, even in the best of times. Add in record-high interest rates and skyrocketing home prices, and it can seem almost impossible. But what really may be holding you back from buying your first home is not knowing just how much you should save for a home.

While the 20% expected down payment is (mostly) a thing of the past, you’ll still need a hefty sum to purchase your home — especially in today’s market. You’ll also need to account for closing costs and other fees in your savings plan.

Wondering how much you’ll need to save before you buy your first home? Consider these questions when setting your home savings goal.

How much house can you afford?

How much you’ll need to save for your home depends on how much you plan to spend. One rule of thumb is to spend about 2.5 to 3 times your annual income on a home. So if you bring in $60,000 a year, shoot for a home that’s worth $150,000-$180,000. If you make $100,000 a year, a home worth $250,000-$300,000 is a good number.

This rule of thumb is merely a starting point. If you’re carrying a lot of debt, or your area has high real estate taxes, or if you want to live well under your means to achieve another financial goal, like early retirement, then you may want to aim for a smaller one.

Remember, you don’t have to sign on the dotted line for a mortgage at the very top of your budget. There’s something to be said for an affordable but comfortable starter home.

How big of a down payment do you need?

The longstanding benchmark when buying a home is that you need a 20% down payment. While that is a solid goal to aim for, it’s not always necessary. These days, down payments range from zero down up to 20%.

While zero-down mortgages are rare, they do exist. VA and USDA both offer zero-down mortgages, but you must meet the requirements to be eligible. And just because you qualify for a zero-down mortgage doesn’t mean you’ll be stuck paying private mortgage insurance (PMI). Both VA and USDA loans offer exemptions to this.

Fannie Mae’s HomePath and Freddie Mac’s Home Possible are two mortgage programs that offer 3% down mortgages. HomePath mortgages are for homes that have gone through foreclosure and are owned by Fannie Mae. Home Possible loans are reserved for buyers under a certain income threshold (80% of Area Median Income).

FHA loans require just a 3.5% down payment. Backed by the Federal Housing Administration, these loans come with one major caveat—you’ll have to pay PMI for the life of the loan or a specified period, and the only way to get rid of it is to refinance to a conventional loan. 

If you don’t qualify for any of the above, you’re most likely looking at a conventional mortgage. With it, you’ll likely pay between 5-10% as a down payment, plus closing costs. And don’t forget about PMI. You’ll have to pay this until you’ve reached 20% equity in your home.

How much are we talking for a down payment, numbers-wise? Let’s say you purchase a home that’s $200,000, with a 10% down payment of $20,000. According to this calculator, with today’s interest rate of 7.59%, your closing costs for a 30-year fixed, conventional mortgage ring in at $6,316.25. This includes underwriting and processing fees, appraisal, titles, closing and escrow, and taxes. So to purchase a $200,000 home, you’d need to save approximately $26,316.25.

What if you get a VA loan for $300,000 for a 20-year, fixed-rate mortgage, and that interest rates go down a bit, to 5.5%? You wouldn’t have to pay PMI or pay a large down payment, but you’d still be on the hook for closing costs. Expect to pay around $8,107 to get into your new home.

Now we are bumping up the purchase price of a home to $400,000 while securing a conventional mortgage with 2018’s 4.54% interest rate. (We can dream, can’t we?) After putting 8% down, it would still leave you with a $33,200 down payment, plus closing costs, for a total savings needed of $42,955.89.

How much will you pay in fees and closing costs?

When you buy a home, you’ll have to pay more than just the down payment. You’ll also be responsible for covering closing costs, which can be between 2-5% of the home’s total purchase price.

What are closing costs? Closing costs include mortgage fees, attorney’s fees, property appraisals, and taxes.

You may be able to get some help with closing costs. If you buy with an FHA loan, they may be included in your 3.5 percent down payment. Plus, many state homeownership programs offer assistance with closing costs.

What other costs should you consider?

Unfortunately, your down payment and closing costs aren’t the end. When saving for a home, you’ll also need to factor in some other costs. These include home inspections, legal fees, and a title search.

Remember that not all of these costs are the homebuyer’s responsibility. The home you buy, the lender’s requirements, and other factors will determine which costs you’ll have to pay. Still, they can add up, so you’ll want to take them into account when saving for a home.

The cost of moving is another big one. The average cost of a long-distance move is $4,300, but that number can vary if you opt for a more full-service approach or if you plan to pack, load, and unpack yourself.

How do I know if I’m ready to buy a house?

This answer will be different for everyone, but there are a few things to consider. First, if you can’t save up for a down payment of at least 10%, that could be a sign that you’re ultimately getting into an unaffordable mortgage. This doesn’t mean that you have to opt for the 10% down payment — it just means you have the funds to do so.

Second, calculate how much your mortgage payment will be each month and factor that into your budget. You may want to rethink things if it’s significantly more than what you’re paying for housing now.

Third, check in on your credit. If your credit score is lacking, it may be a sign to wait to buy. Lower credit scores often translate into higher interest rates on your mortgage, which means it will take you longer to start making a dent in the principal of your loan.

experian boost

One of the easiest ways to check your credit score and quickly improve it is with Experian Boost®. It’s free to use and after you’ve signed up, Experian will check to see if you have things like rental payment history on your credit report that can be used to show good credit use and improve your score.

Frequently Asked Questions (FAQ)

What’s the best way to save for a house?

First, make a budget, and work on cutting expenses. Set up a regular savings plan, such as automatic contributions to a bank account separate from your everyday spending money. Make sure your credit is up to par since that will ultimately affect how much house you can afford. Lastly, be realistic about what you can afford. No one wants to be “house poor.”

Why do I have to pay PMI?

Private mortgage insurance is insurance you will likely have to buy if you have a conventional loan and your down payment is less than 20%. Many lenders will drop the PMI once you reach 20% equity, but with some loans, you may have to refinance to get rid of it.

What’s the best bank account to save for a home?

Consider socking your savings for a home in a high-yield savings account. This type of account will earn you a higher interest rate, but still keep your funds secure.

Why are closing costs so expensive?

While closing costs may seem like a surprise (and not the good kind) when you’re in the process of buying a home, they’re largely unavoidable. Closing costs are usually 2-5% of your home’s purchase price, and include things like appraisal fees, title searches, surveys inspections, and more.

The Bottom Line

There’s no magic number to sock away for a home purchase. You’ll have to run those calculations on your own, taking into account your earnings, debt, and down payment. And don’t forget about closing costs, home inspections, and legal fees.

Once you do have your magic number, you can start working toward your goal of homeownership. And you can do so with peace of mind that you are opting for a home that you’ll not only love but that you can comfortably afford.


  • Abby Hayes

    Abby is a freelance journalist who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three. She has a B.A. in English Literature from Indiana University Purdue University Indianapolis, and lives with her husband and children in Indianapolis.

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