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How Much Should You Save to Buy a House?
There are a few defining moments in our lives. For some, it’s the realization that buying that first home is within reach, both financially and emotionally. It’s a big step, and it’s one that’s built into the American dream. And if you’re left wondering how much money you should save before buying a house, you’re not alone. These costs can add up quickly.
After you’ve made the big decision to start shopping for a home, you might be surprised to find that coming up with the cash down payment is only one of several financial hurdles you’ll need to clear. Exactly how much you should save for a house depends on a number of factors, like the value of the home you’re targeting and the amount of money you intend on pushing into your down payment.
What is the average down payment on a house?
For many, saving 20 percent of a home’s value can seem unreachable, and it’s not unusual for most homebuyers to put far less than this amount down. Although it’s hard to specify exactly what a typical down payment on a house is, most homes are purchased with a conventional loan — around 5 percent of the total purchase price. Paying less than 20 percent down is the way most homes are purchased.
Additional Costs to Consider when Saving to Buy a Home
After you’ve got the details from a lender about your purchase limits, you’ll have a pretty good idea of what your monthly payment will look like. Try using a free online mortgage calculator to estimate these costs. Because you may face other expenses both at closing and after you take ownership of the home, you’ll likely need additional savings in place to cover all the expenses you’ll encounter after relocating.
Closing costs to save for when buying a home
As you move closer to your move-in date, your lender will get you details on estimated closing costs. Closing costs can vary from one home purchase to the other because some of these expenses can be used as bargaining chips in a real estate transaction. Closing costs pay for fees charged by a myriad of parties when a piece of real estate changes hands. From prepaying real estate taxes to fees for running your credit report to PMI one-time charges when applicable, buyers should expect to pay anywhere from 2 to 5 percent of the total home purchase price in closing costs.
When saving up for a home, it’s key to have a reserve of cash savings — or an emergency fund — that isn’t used for the down payment or closing costs. It’s a good idea to have at least 3-6 months of living expenses saved up in this cash reserve.
Emergency funds are really important to help prevent you from defaulting on your mortgage payments. Equally important, many mortgage lenders may require that you have cash savings on hand in addition to the down payment amount.
Take the Next Steps Towards Buying a Home
Saving for a home is only the first step on your path to homeownership. Learn more about the process and tips to find the home of your dreams with our first-time home buyers guide. This guide will help you navigate the uncharted territory of your home purchase journey.