We are an independent, advertising-supported comparison service. Our objective is to empower you to make confident financial decisions by giving you access to interactive tools and financial calculators, publishing original and unbiased content, and allowing you to conduct free research and information comparisons.
Issuers that Bankrate has partnerships with include American Express, Bank of America, Capital One, Chase, Citi, and Discover, among others.
Buying a house is a major life decision, and one that comes with a hefty price tag While the dream of homeownership is enticing, it’s crucial to approach the process with a clear understanding of your financial situation and how much you can realistically afford to spend This includes not only the down payment, but also the ongoing costs associated with owning a home.
One of the most important questions you’ll need to answer is how much of your savings you should allocate towards purchasing a home. There’s no one-size-fits-all answer as the ideal amount will vary depending on your individual circumstances. However, there are some general guidelines and factors to consider when making this decision.
The 25% Rule: A Starting Point
A common rule of thumb is to aim for a down payment of 20% of the home’s purchase price. This helps you avoid paying private mortgage insurance (PMI), which can add to your monthly expenses. However, if you don’t have 20% saved up, don’t despair. There are loan options available with lower down payments, such as FHA loans that require just 3.5% down.
While the 20% down payment is a frequently cited benchmark, it’s important to remember that it’s just a starting point. In reality, the amount you should spend on a house depends on a variety of factors, including:
- Your overall financial situation: This includes your income, debt, and other expenses. A good rule of thumb is to ensure that your housing costs (including mortgage payments, property taxes, and insurance) don’t exceed 28% of your gross monthly income.
- The cost of the home: The higher the price of the home, the more money you’ll need to save for a down payment.
- Your risk tolerance: If you’re comfortable taking on more risk, you may be willing to put down a smaller down payment. However, this also means you’ll be paying more in interest over the life of the loan.
- The current market conditions: In a hot market, you may need to save up more money for a down payment to be competitive.
Beyond the Down Payment: Additional Costs to Consider
It’s crucial to keep in mind that the down payment is only one component of the total cost of a house when creating your budget. You’ll also need to factor in other costs, such as:
- Closing costs: These can range from 2% to 5% of the purchase price and cover expenses such as appraisal fees, title insurance, and attorney fees.
- Moving costs: The cost of moving can vary depending on the distance you’re moving and the size of your belongings.
- Homeownership expenses: This includes ongoing costs such as property taxes, homeowners insurance, and maintenance.
The Importance of an Emergency Fund
Even after you’ve purchased a home, it’s important to maintain an emergency fund. This will provide you with a financial cushion in case of unexpected expenses, such as job loss, medical bills, or home repairs. Ideally, your emergency fund should cover at least 3-6 months of your living expenses.
Making the Right Decision for You
Ultimately, the decision of how much of your savings to spend on a house is a personal one. There’s no right or wrong answer, and the best approach will vary depending on your individual circumstances. By carefully considering the factors outlined above, you can make an informed decision that aligns with your financial goals and risk tolerance.
Here are some additional tips for saving for a house:
- Create a budget and track your expenses: This will help you identify areas where you can cut back and save more money.
- Set realistic savings goals: Don’t try to save too much too quickly. Start with a small, achievable goal and gradually increase it over time.
- Automate your savings: Set up automatic transfers from your checking account to your savings account. This will help you save money consistently without having to think about it.
- Consider all of your options: There are a variety of ways to save for a house, such as through traditional savings accounts, CDs, or investment accounts. Shop around to find the best option for you.
Remember, buying a house is a big decision. Planning ahead and saving money will ensure that you have enough money for this significant life event.
Breaking down the cost of buying a home
When evaluating a home’s price, it’s critical to factor in the significant costs you’ll incur to claim it as your own:
The down payment is the amount of money you contribute to the home purchase upfront. You can reduce the amount of money you need to borrow by making a larger down payment. This will lower your monthly payments for the duration of the loan. Greater down payments are preferred by lenders since they show less risk of default on the loan.
There is a common misconception that you need to put down 20 percent of the purchase price. (If you’re buying a home that costs $400,000, a 20 percent down payment would be $80,000.) In fact, first-quarter 2023 data from Realtor.com found that the average down payment on a primary residence was just 13 percent.
In addition, several low- and no-down payment mortgages allow for even less money upfront. Some conventional mortgage programs backed by Fannie Mae and Freddie Mac require just 3 percent down. One thing to keep in mind about these loans is that they may have income limitations and demand a higher credit score. FHA loans require just 3. 5 percent down, and you’ll need a credit score of at least 580 to qualify. There is no down payment required for VA loans or USDA loans, but you must fulfill specific requirements to be qualified.
Ultimately, figuring out your down payment means thinking about the rest of your budget. Spending every dollar you have on a down payment will only cause you to overextend yourself and become stressed out trying to pay for all of your other essential expenses. Additionally, a lender will assess your whole financial history and look for evidence of cash reserves that you could utilize to repay the loan in the event of financial difficulty. Additionally, you should make sure that you have enough money saved in an emergency fund to act as a buffer in the event that you incur unanticipatedly high medical costs, lose your job, or experience any other worst-case scenario.
It takes work to come up with that large upfront cost when buying a home, no matter how much you intend to put down. Consider these helpful tips to build your down payment funds:
- Seek out local assistance: Research first-time homebuyer initiatives in the state and city where you wish to purchase a property. Some, if you qualify, provide grants or low-interest loans to cover the costs of your down payment.
- Determine every expense you can reduce: Spending less is the first step toward saving more. Look at your weekly and monthly expenses to find ways to reduce your spending. Can you cancel your cable service? Are you paying too much for your cell phone service? Should you be eating out less?
- Invest your savings: Every additional dollar matters, whether it’s in high-yield savings accounts or CDs. Consider comparing the interest rates of various options where you can park your money instead of saving in an account that offers little to no interest. Just make sure the money will be available to you when you need it.
- Seek assistance: A gift can be used for the down payment if you have a close friend or relative who has the money and who loves you enough to give it to you without any conditions. Make sure to include a gift letter explaining that you won’t be required to repay the money since the lender will want confirmation that it is, in fact, a gift rather than a loan.
The down payment isn’t the only upfront expense you need to consider. You can expect to pay 2 percent to 5 percent of your mortgage loan principal in closing costs. ClosingCorp reports that in 2021, the average amount that borrowers paid in closing costs and taxes for a single-family home was $6,905. Closing costs vary widely based on where you’re buying, however. For example, average closing costs in Washington, D. C. , were nearly $30,000, but they were just $2,061 in Missouri.
A variety of fees assessed by your lender and other businesses involved in approving your loan and completing the sale are included in the closing costs. These can include fees for the following:
- Appraisal
- Credit report
- Origination
- Application
- Title search
- Title insurance
- Underwriting
Lender-to-lender variations exist in closing costs; therefore, it is important to closely monitor the origination and underwriting fees to identify potential areas of savings. It’s crucial to remember that there will probably be some extra costs you have to pay on closing day that aren’t included in the closing costs. These are known as prepaids, and can include homeowners insurance premiums and property taxes. You’ll also prepay interest on any days remaining through the end of the month. For example, if you close on April 20, you will prepay on interest through April 30.
You can’t avoid closing costs completely, but you can avoid paying them all at once. You may also be able to negotiate at least some closing costs, especially in a buyer’s market.
If coming up with cash to pay for closing costs seems daunting, ask your lender about no-closing-cost options. Some lenders will roll the expenses into the overall loan. Just bear in mind that you will ultimately incur higher costs because you will be required to pay interest on the additional amount.
You should budget for moving costs, furniture, repairs, storage, and any other expenses you may incur when you move into your new house in addition to closing costs and prepayments.
Apart from closing costs, you’ll also need to pay prepaid costs. These are one-time cash payments made at closing for specific mortgage costs, such as homeowners insurance, property taxes, and mortgage interest, that you pay for before they are actually due. Your lender will probably place your money in escrow for these regular monthly expenses until the bills are due.
Prospective buyers also pay an earnest money deposit to demonstrate serious intent to purchase a home. You’ll typically need to pay 1 percent of the home’s agreed-upon purchase price. But earnest money is not an additional expense, it’s just paying a bit of your expenses early. After your offer is accepted, you make the deposit within a day or two, and it is applied to your payment at closing.
Additionally, your lender will check to see if you have sufficient savings left over to pay your mortgage in the event of an emergency or a change in your income. Mortgage reserves are measured in months. For instance, if your monthly home loan payment is $1,200 and you have $7,200 in savings after closing on your property, you will have six months’ worth of reserves. Non-liquid assets, like funds that can only be withdrawn upon retirement, typically don’t qualify as reserves.
In addition to actually buying a home, you need to budget for the costs of moving into it. The size of your house, the distance you’re moving, the weight of your belongings, and whether you’ll need storage for a period of time in between all affect the price. According to HomeAdvisor, a typical move ranges between $913 and $2,528, with the average being about $1,711.
Make sure to account for the price of little things like boxes, packing tape, and bubble wrap that add up over time. You should also investigate how much it might cost to update your address on multiple IDs and accounts, as well as how it might affect bills like auto insurance.
Keep in mind that, while local moves might be expensive, out-of-state or cross-country moves are much costlier. Along the way, long-distance moves also come with extra costs, like lodging, gas, or airfare to get from point A to point B.
Knowing how much a house will cost each month, not just on closing day, is important information to consider when calculating how much money you need to buy one.
Your monthly mortgage payment is one of the most predictable ongoing costs. You can use Bankrate’s mortgage calculator to figure out how much you’ll owe each month. For example, if you borrow $240,000 and finance it with a 30-year, fixed-rate mortgage at 6. 0 percent, you’d pay $1,438 in monthly principal and interest.
It is important to shop around for the best mortgage rate with multiple lenders because it will have a significant impact on your monthly mortgage payment. For example, if you got that same $240,000 loan at a 7. 0 percent rate, the payment for monthly principal and interest increases to $1,596.
According to a Consumer Financial Protection Bureau study, more than three-quarters of all borrowers only applied for a mortgage with one lender. Failing to comparison-shop could cost you thousands over the life of the loan.
If you put less than twenty percent down, your mortgage payment will probably include mortgage insurance in addition to principal and interest. Mortgage insurance is a protection for the lender in case you ever cannot pay the loan back.
It is highly likely that you will pay mortgage insurance if you have an FHA loan. This insurance consists of an upfront premium and additional premiums that are incorporated into your mortgage payment. The annual premiums will likely last for the entire loan. You will pay private mortgage insurance (PMI) on a conventional loan with a down payment of less than 20% until you have 20% equity in the house; at that point, you can cancel the PMI. Ask your lender for an estimate of how much PMI will add to your bill as the cost varies depending on your credit and loan.
How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We always work to give customers the professional guidance and resources they need to be successful on their financial journey.
Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
By outlining our revenue streams, we are open and honest about how we are able to provide you with high-quality material, affordable prices, and practical tools.
Bankrate. com is an independent, advertising-supported publisher and comparison service. We receive payment when you click on specific links that we post on our website or when sponsored goods and services are displayed on it. Therefore, this compensation may affect the placement, order, and style of products within listing categories, with the exception of our mortgage, home equity, and other home lending products, where legal prohibitions apply. The way and location of products on this website can also be affected by other variables, like our own unique website policies and whether or not they are available in your area or within your own credit score range. Although we make an effort to present a variety of offers, Bankrate does not contain details about all financial or credit products or services.
For first-time homebuyers, figuring out how much money you need to buy a house has always been difficult, but 2023 might feel like a whole new level of frustration. Between sky-high prices and surging mortgage rates, thinking about your budget can feel downright maddening. Despite the fact that most markets are still seller’s markets, purchasing a home is still a wise choice that can help you build a solid financial foundation for the future. Here’s a rundown of the key costs in making homeownership a reality.
How Much Home You Can ACTUALLY Afford (By Salary)
FAQ
How much money should you have in savings after buying a house?
What is the 50 30 20 rule?
Is it wise to spend all your savings on a house?
How much should I save for a $300000 house?
How much money do you need to save on a home loan?
How much you need to save will depend largely on how much house you hope to be able to afford. This home affordability calculator can help you settle on a target home budget. Other factors, including where you want to live and the type of loan you get, will also play a role in how much money you’ll need to save.
How much should you save when buying a house?
The amount you need to save when buying a house depends on several factors, such as the purchase price of the home, the down payment, closing costs, and other expenses. The traditional down
Should you take money from your savings if you’re buying a house?
It’s tempting — after all, the money’s right there — but try to avoid taking from existing savings that you have earmarked for other goals. That includes: Your emergency fund. Yes, it’s money you’ve set aside in case you need it, but wait until you really need your emergency fund — which could be while you’re buying a house.
How do I save money on a house?
By determining how much you want to save, for what, and how soon, you give yourself a yardstick to measure your progress. Determine your optimal monthly payment using the 50/30/20 budget method. Calculate how much house you can afford based on that calculation. Aim to save 20% of your future home’s cost.