How much money should I save before buying a house?

Buying a house is a major life decision, so it’s understandable if you find the entire process overwhelming.

Saving up enough money to buy a house is a long road, but often a worthwhile one. According to the most recent Census data, the average price paid for a home in the U.S. was $495,100 in the second quarter of 2023. That’s a lot of money for most people, which is why they take on mortgages to help pay for the cost.

But even with a mortgage, there are plenty of up-front costs. Each bank’s requirements vary, but you’ll likely need to make a down payment and pay additional fees.

Housing prices also vary by region, and you might find your local housing market more (or less) expensive. Other factors, like the size of the home and its condition, also impact the sales price. While there is certainly a lot to consider when saving for a house, you can make the process easier with proper research. Here’s what first-time homebuyers should know.

What does a house cost?

There is more to a home’s bottom line than its sales price. Other expenses include the down payment, private mortgage insurance (PMI), closing costs, and inspection or appraisal fees.

The sales price is the amount the seller is willing to accept from a buyer. Sometimes, sellers might be willing to negotiate the listed price, especially if they have trouble attracting potential buyers. However, if there is lots of competition among buyers, they might bid against one another and offer more to purchase the home. In some areas of the country, waiving the inspection has become a popular way to entice sellers to accept an offer.

Another part of the home’s cost is the down payment. The industry standard for a down payment is 20% of the home’s sale price. However, lenders often accept less depending on the mortgage type and your credit score / credit history.

If the down payment for your home is less than 20%, you’ll likely need to pay PMI, which your lender will tack onto your monthly payments until you build up equity in the home. PMI can add several hundred dollars to your mortgage payment, depending on how much your loan is for.

Closing costs are another upfront expense you’ll pay once you finalize the purchase. They include lender and escrow fees, property taxes, and insurance. Closing costs vary but are typically between 2% and 5% of the home’s sales price.

Finally, you might be on the hook for inspection and appraisal fees if you didn’t waive these steps. These costs pay for the home inspection, which can alert you to any issues about the property’s condition before you buy the house.

How do mortgages work?

A mortgage is the loan you’ll use to buy a house. The home and land are collateral, which your lender can foreclose on if you stop making payments. You’ll continue making payments until you ultimately pay off your mortgage. This timeline varies but usually lasts up to 30 years.

The size of your mortgage will vary depending on the home’s sales price and your down payment. Other factors, like the interest rate, also impact your monthly payment.

Of course, you can’t simply borrow as much as you want and buy that lakeside mansion. Your lender will consider various factors, like your credit history and current income, before determining how much you qualify for.

When you’re ready to buy a home, you can seek preapproval for a mortgage. That way, sellers will take your offer more seriously since they know you’ve already done the legwork to obtain financing.

How do down payments work?

A down payment is the money you pay your mortgage lender upfront when you buy a house. The down payment is a percentage of the home’s value, usually 20%. For instance, if you’re buying a $400,000 home with a 20% down payment, you’d pay $80,000 upfront.

Coming up with a sizable down payment is one of the most challenging parts of buying a home. You might need to save for months or years before you have enough to buy a home. However, the good news is that many mortgage lenders are flexible, and getting a mortgage with as little as a 3% down payment is possible. Most states have programs assisting first-time home buyers, providing grants, lower down payments, and special interest rates.

However, a larger down payment on your home has a few benefits, like lower interest rates. The lower your interest rates, the less you’ll pay the bank for your mortgage. A lower interest rate could translate into a monthly payment that’s cheaper by $100 or more, depending on the amount you borrow.

Larger down payments can also help you avoid PMI. Some loans require PMI unless you put down at least 20% of the loan’s value. If you must pay PMI, the additional money paid to the lender might decrease the overall price you can afford.

How to save up for a down payment

While saving for a down payment might sound tough, especially in the current housing market, it’s entirely doable.

Start by estimating what you’ll need to pay for a home that fits your needs. Research real estate listing websites like Zillow or Redfin to see what houses are selling for in your area. If you have specific requirements, like living in a particular neighborhood or having several bedrooms, filter by those criteria before assessing price.

Once you have a rough estimate of what you’ll need to buy a home that suits you, calculate the down payment amount. Estimate paying between 3% and 20% of the home’s sales price for a down payment. You might check with various mortgage lenders to determine their down payment requirements.

After determining what you need to save, evaluate your current budget to determine how much you can reasonably set aside monthly. You might need to make some lifestyle adjustments or increase your income to meet your savings goals faster. Some people commit to downsizing, where they live well below their means until they have enough saved for a down payment. Others take on a side hustle to bring in extra money, then put the extra away until they reach their goals.

Setting a date for meeting your savings goals is a good idea. That way, you can compare your progress over time, motivating you to continue working toward your objectives.

Saving for a house takes time but is worthwhile

The best things in life come with hard work, as the saying goes. Standing in your new home and imagining your future can be incredibly gratifying, making all that effort worthwhile. While you might need to take measures to meet your savings goals quicker, you’ll be happy you did. Research how much you’ll need for a down payment and start saving.

Of course, saving for a new home is just one part of being an adult — another is life insurance. As a homeowner, you want to ensure your family retains their house should you die, and thus deprive them of your income to help make the monthly mortgage payment.

A term life insurance policy can provide the protection you’re looking for. Haven Life offers affordable term life insurance policies with up to $3M in coverage. Get a free online life insurance quote today.