How To Save Money for a House Down Payment
November 6, 2020
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The first part of buying a house is saving for your down payment.
This guide will help you look at how much you need to save before you buy.
First, you need to figure out how much house you can afford. That comes down to three things: your down payment, your closing costs, and your monthly housing expenses.
This is the amount you pay at the time of closing (basically, when you get your keys).
Down payments usually range from 5-20% of the total home price.
Say your new home costs $250,000. You might put 10% down. That would mean paying $25,000 to get into your new house.
You’d have a mortgage for the remaining $225,000. You’d usually pay in monthly installments over the next 10 to 30 years, depending on your mortgage.
The more you can pay for your down payment, the better.
For starters, a higher down payment means you’ll take on less debt. And that means paying less in interest over the life of your mortgage.
But that’s not the only perk. If you can put 20% down for your house, you’ll avoid private mortgage insurance (PMI). Lenders charge PMI to protect themselves when people can’t put a full 20% down.
Usually, PMI costs 0.5-1% of your total loan. For that $250,000 home with 10% down, that would mean paying more than a couple thousand dollars each year for PMI.
All told, if you can make it to 20% for your down payment, you’ll keep more money in your pocket as you own your home.
Closing—that time where you sign documents, pay your down payment, and get your keys—comes with costs.
Closing costs might include the inspection for your house, appraisal fees, and real estate agent fees.
Generally, you should expect to pay about 4% of your home’s total price in closing costs.
Now, it’s time to figure out how much you’ll pay for your house each month.
That means doing some math.
Total up your monthly income.
Experts say you shouldn’t put more than 30% of your monthly take-home pay toward housing. So multiply your takehome pay by 0.3.
But don’t assume that’s the amount you can put toward a monthly mortgage payment.
A house comes with other expenses that you don’t pay as a renter. On top of your mortgage, homeownership means paying for:
Trulia, the real estate listing company, has a pretty thorough mortgage calculator. You can use to figure all of these expenses out based on where you live.
Play with the numbers. Input how much you can pay for your down payment (make sure you keep closing costs in mind).
Then, adjust the Home Price slider until the per month number is equal to or less than 30% of your takehome pay.
Once you find the sweet spot, you’ll know how much house you can afford.
When you’re doing this, it’s good to leave yourself a cushion. Owning your own home means that if something breaks, you’re the one who has to pay to fix it.
You’ve finished the math part of this process. Now, it’s all about building up the money for your down payment and finding a home you love.
Here are our top tips for saving for your down payment:
With some focus and lifestyle changes, you can work your way to the down payment you need.
Just make sure you figure out how much house you can afford first. That way, you can enjoy homeownership without too much financial stress.
Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s).
The first part of buying a house is saving for your down payment.
This guide will help you look at how much you need to save before you buy.
Figure out how much house you can afford
First, you need to figure out how much house you can afford. That comes down to three things: your down payment, your closing costs, and your monthly housing expenses.
The down payment
This is the amount you pay at the time of closing (basically, when you get your keys).
Down payments usually range from 5-20% of the total home price.
Say your new home costs $250,000. You might put 10% down. That would mean paying $25,000 to get into your new house.
You’d have a mortgage for the remaining $225,000. You’d usually pay in monthly installments over the next 10 to 30 years, depending on your mortgage.
The more you can pay for your down payment, the better.
For starters, a higher down payment means you’ll take on less debt. And that means paying less in interest over the life of your mortgage.
But that’s not the only perk. If you can put 20% down for your house, you’ll avoid private mortgage insurance (PMI). Lenders charge PMI to protect themselves when people can’t put a full 20% down.
Usually, PMI costs 0.5-1% of your total loan. For that $250,000 home with 10% down, that would mean paying more than a couple thousand dollars each year for PMI.
All told, if you can make it to 20% for your down payment, you’ll keep more money in your pocket as you own your home.
Closing costs
Closing—that time where you sign documents, pay your down payment, and get your keys—comes with costs.
Closing costs might include the inspection for your house, appraisal fees, and real estate agent fees.
Generally, you should expect to pay about 4% of your home’s total price in closing costs.
Ongoing housing expenses
Now, it’s time to figure out how much you’ll pay for your house each month.
That means doing some math.
Total up your monthly income.
Experts say you shouldn’t put more than 30% of your monthly take-home pay toward housing. So multiply your takehome pay by 0.3.
But don’t assume that’s the amount you can put toward a monthly mortgage payment.
A house comes with other expenses that you don’t pay as a renter. On top of your mortgage, homeownership means paying for:
- Property tax
- Homeowners insurance
- Private mortgage insurance (if you put less than 20% down)
- Homeowners association (HOA) fees (if you buy a home within an HOA)
Trulia, the real estate listing company, has a pretty thorough mortgage calculator. You can use to figure all of these expenses out based on where you live.
Play with the numbers. Input how much you can pay for your down payment (make sure you keep closing costs in mind).
Then, adjust the Home Price slider until the per month number is equal to or less than 30% of your takehome pay.
Once you find the sweet spot, you’ll know how much house you can afford.
When you’re doing this, it’s good to leave yourself a cushion. Owning your own home means that if something breaks, you’re the one who has to pay to fix it.
Start saving and shopping
You’ve finished the math part of this process. Now, it’s all about building up the money for your down payment and finding a home you love.
Here are our top tips for saving for your down payment:
- Set up a separate savings account. It’s all too easy to spend money when it’s in your checking account. Open a separate savings account to protect the money you’re setting aside for your house. To maximize your money, choose a high-yield savings account. That way, you’ll earn interest on the money in the account while you’re saving up.
- Scale back on spending. If you pay for stuff you don’t need, cut it. We’re looking at you, extra streaming services and unused gym memberships. Go through your budget to find places where you can trim some fat.
- Consider a side hustle. This doesn’t have to be complicated. Drive for a rideshare service. Make stuff and sell it on Etsy. Any extra money you can pocket helps you reach your down payment faster.
- Plan a staycation. Vacations are pricey. While you’re saving for your house, scratch the itch to get out by setting up a fun (but cheap) staycation in your hometown.
With some focus and lifestyle changes, you can work your way to the down payment you need.
Just make sure you figure out how much house you can afford first. That way, you can enjoy homeownership without too much financial stress.
Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s).
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Writer Bio
Kacie Goff
Kacie Goff has over five years of experience writing personal finance content for a wide range of audiences. She's always loved taking complex concepts and distilling them down so they're more accessible to others. As she creates content, she aims to educate and engage, helping people discover that successfully managing their money can be easier than they ever imagined. Over the last five years, she’s also covered personal and commercial insurance, home design, health and wellness, and more for publications including Bankrate, Freshome, The Simple Dollar, and websites of a broad variety of businesses. Her brand is Jot Content (jotcontent.com).