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Find out all the expenses related to buying a home so you know how much money to save before you start shopping.
Are you wondering whether your pocketbook is ready for homeownership?
Purchasing a home comes with several financial obligations that can intimidate first-time homebuyers who wonder if their bank account is ready for the leap.
We take the mystery out of home-buying by showing you what fees and expenses you need to prepare for, including the down payment, closing costs, fees, insurance, and taxes.
We also provide recommendations on how much money you should put aside in an emergency savings account before buying a home.
Before you leave, bookmark this page so you can return anytime you have questions about how much you need to save before you buy a home.
- How Much Should You Save To Buy A Home
- How Much Should You Have In Your Savings Account Before You Buy A Home
- How Much Money To Save For A House – Checklist
How Much To Save Before You Buy A Home
Purchasing a home involves several fees and expenses that you might not know about, especially if you’re a first-time homebuyer.
In this section, we show you what expenses you’ll need to save for before you can responsibly begin the process of finding and purchasing a home.
The exact amounts fluctuate depending on your lender and mortgage options, but you can use this list to estimate costs before you start shopping.
Down Payment: 20% Of Purchase Price
A down payment is an amount you pay upfront when buying a home. It applies to the total purchase of the house, reducing the amount of your mortgage loan.
Many bankers encourage people to buy homes with smaller down payments, because the more money you borrow, the more profits the bank earns.
Although you can buy a home with a smaller down payment, sometimes as low as 2 – 3 % of the purchase price, it’s a costly decision.
If your down payment equals less than 20% of the purchase price of your home, you’ll have to pay for your bank’s private mortgage insurance (PMI).
Private mortgage insurance will hit your pocketbook hard, and it offers no benefits to you, the buyer. PMI is an insurance for your lender that covers them in the event that you fail to make your mortgage payments.
PMI costs between .5% – 2% of your total mortgage each year.
For example, if you purchase a $285,000 home (the average listing price in the U.S.), you can expect to pay up to $3,420 per year (that’s $285 per month) for private mortgage insurance.
Technically, you only need to pay PMI until your equity reaches 20%, but removing the expense can be a hassle. You’ll need to submit a formal letter with a new appraisal, and often wait months for it to go through the system and get removed from your mortgage.
Private mortgage insurance is a massive waste of money.
Imagine the investments, home furnishings, or experiences you could enjoy with an extra $3,400 per year!
You’ll avoid hefty PMI payments by saving at least 20% for a down payment on your home before you buy.
Mortgage debt is pricey.
Private mortgage insurance isn’t the only reason to make a minimum 20% down payment on your new home.
The bank earns its money through the interest you pay on your mortgage loan, and that interest isn’t cheap.
If you haven’t saved at least 20% for a down payment on your home, you might want to delay purchasing until you’ve banked the recommended amount. Low down payments mean higher mortgage payments and unnecessary fees.
Cut your interest rates by comparing lenders before you buy.
An extra point or two of interest can cost a lot of money when making a large purchase such as a home.
You can cut interest costs by taking a couple minutes to compare rates from vetted lenders at a site like Credible.
According to a 2020 report by the National Association of Realtors, 13% of all homebuyers say that saving for the down payment was the most difficult part of buying a home, and only one-third of people financed less than 80 percent of their homes.
That’s why most people (including your banker) will probably tell you that saving 20% for a down payment on your home is “over the top” or “unnecessary.”
If you think with the Minority Mindset, though, you’ll see those statistics and say “Hey! Here’s a unique opportunity to save a small fortune!”
Saving 20% of the purchase price before you buy a home takes a lot of patience and discipline.
But, if you’re determined to build wealth throughout your lifetime, you focus on what you’ll do with that extra $100,000, and start picking up odd jobs or side hustles that can help you save a 20% down payment quicker.
Closing Costs: 1.5% – 2.5% Of Total Purchase Price
At the time of purchase (when you sign for your mortgage loan), you’ll pay additional costs and fees that aren’t covered by your down payment.
These “closing costs” typically add up to between 3 – 5% of your home’s total purchase price, and are normally split between the buyer and seller.
Reserves: Equal To Two Mortgage Payments
Reserves is money in your bank account that’s leftover after you purchase your home.
Most banks require verification that you have at least two months’ mortgage reserves in your bank account at the time of purchase.
For example, if your mortgage is $1500, you’re required to have $3000 (two mortgage payments) in reserves at the time of purchase.
Insurance and Taxes: Equal To Six Months – One Year
Most lenders require borrowers to include property taxes and home insurance premiums in their monthly mortgage payments.
Often, the first six months – one year of taxes and insurance must be paid in advance at the time of closing.
The bank deposits these tax and insurance funds into an escrow account and pays on your behalf when they are due.
Survey, Appraisal, And Inspection Fees: $600 – $2000
When purchasing a home, you’ll encounter miscellaneous fees such as:
- Survey and appraisal fees: $300 – $1500, depending on the size of your home and where it’s located.
- Private home inspection fee: $300 – $500, depending on the size of your home, where it’s located, and how much you want inspected.
These fees change depending on several factors, such as the size of your home, state you live in, and how thorough you want your inspections.
Now that you know about the additional fees and expenses you incur when buying a home, you can understand how seemingly “small” details can add up to large expenses.
One of the ways to cut the cost of homebuying is to find a mortgage with a lower interest rate. By using a comparison site such as Credible, you can compare rates from several vetted mortgage lenders in minutes.
The money you save on interest rates can help to offset some of the fees and expenses you pay for when buying a home.
How Much Should You Have In Your Savings Account Before Buying A Home?
In the first section, we explained how much money you need to save to cover expenses related to buying a home.
Buying costs aren’t the only thing you need to budget for, though.
After all your home-buying expenses are covered, you’ll still want to have six months of living expenses safely tucked away in a savings account in case of an emergency.
Unexpected life events happen to everyone at some point throughout their lifetime. You may lose a job or incur medical expenses. Or, your car might break down, demanding a fast cash payment to get it fixed — so you can get to work.
Life is less stressful when you’re prepared for the unexpected. Building an emergency savings will help ensure that you keep your home and enjoy living in it for many years.
Once you purchase a home, your monthly expenses will increase, and you want your savings account to reflect that.
Before you buy, make sure you have six months of homeowner living expenses in the bank.
For example, as a homeowner, you’ll add things like home maintenance, repairs, property taxes, and insurance to your budget.
Here’s a look at what living expenses might look like after you buy a home:
- Monthly mortgage payments
- Water and utilities
- City requirements such as snow removal and lawn care
- City expenses such as trash pickup
- Home maintenance and repairs
- Property Taxes
- Homeowner’s insurance
- Usual living expenses (Food, clothes, insurances, debt payments, etc.)
Before you consider purchasing a home, make sure you’re financially prepared for emergencies by building a savings account equal to six months of what your living expenses will be as a homeowner.
How Much Money To Save For A House – Checklist
Below is a recap of all the expenses you need to prepare for before purchasing a home. You can use it as a checklist to understand how much money you should save before you start shopping for homes.
_____ Down payment: 20% of purchase price
_____ Closing Costs: 1.5% – 2.5% Of Total Purchase Price
_____ Reserves: Equal To Two Mortgage Payments
_____ Additional Expenses (survey, appraisal, and inspection fees): $600 – $2000
_____ Home insurance and property taxes: Equal to six months of taxes and insurance
_____ Emergency savings account: Equal to six months of living expenses, including:
_____ Monthly mortgage payments
_____ Water and utilities
_____ City requirements such as snow removal and lawn care
_____ City expenses such as trash pickup
_____ Home maintenance and repairs
_____ Usual living expenses (Food, clothes, health care, debt payments, etc.)
Preparing Your Finances For Homeownership
Before you start looking at dream homes, review all the expenses related to purchasing and owning a home.
Purchasing a home involves several expenses, including a down payment, closing costs, and miscellaneous costs and fees.
Additionally, adjusting your savings account to reflect six months of “homeowner” living expenses is a critical step toward making a responsible purchase.
The extra preparation you do in advance will go a long way toward allowing you to enjoy your new home for many years to come!
*Advertisement from Credible Operations, Inc. NMLS 1681276, not available in all states. Click here for important information about Credible’s licenses. Address: 320 Blackwell St. Ste 200, Durham, NC, 27701.
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