Saving for a House Down Payment: A Step-by-Step Plan
Buying a home is one of the biggest financial goals most people set. A clear savings plan turns a vague dream into a target with a date.
How much do you need?
Twenty percent down avoids private mortgage insurance on conventional loans, but it is not required. Many conventional loans allow as little as 3 to 5 percent down, and FHA loans allow 3.5 percent for qualifying borrowers. A smaller down payment means a larger loan, a higher monthly payment, and usually mortgage insurance.
Do not forget closing costs
Closing costs often run 2 to 5 percent of the purchase price and cover items such as lender fees, appraisal, title insurance, and prepaid taxes. You will also want a cash cushion for moving costs and early repairs, separate from your emergency fund.
Build your target
For a $300,000 home with 10 percent down: $30,000 down payment, about $9,000 in closing costs at 3 percent, and $3,000 for moving and repairs, for a total of roughly $42,000. Divide by the number of months until you want to buy to get your monthly savings target.
Where to keep the money
If you plan to buy within about five years, keep the savings somewhere stable, such as a high-yield savings account, certificates of deposit, or Treasury bills. Stock market swings could shrink your fund right before you need it.
Ways to get there faster
- Automate a dedicated transfer on payday.
- Direct raises, bonuses, and tax refunds to the fund.
- Look into first-time homebuyer assistance programs offered by your state or county.
- Improve your credit score to qualify for a lower rate, which lowers your monthly payment.
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