Homeownership is a powerful dream – one which over 2 million Americans achieve for the first time every year. Unlike certain major life milestones, the goal of homeownership can be reached through concrete, measurable financial goals. All you have to do is figure out how much to save for a house and then make a plan to get there.
In this guide, we’ll walk you through how much you need to save for your down payment – hint, it’s less than you might think – as well as other hidden purchase costs, like closing fees. We’ll also discuss how to save money for a house, with tips for revamping your budget, embracing frugal living, and other realistic savings strategies. Whether you’re an existing homeowner looking to upgrade or a first-time buyer learning how to save for a house while renting, we’ll help you make a plan.
How much to save for a house
The first question you’ll need to answer to start your home buying journey is relatively straightforward, but you’ll have to do some research to figure out the answer. Let’s talk about how much to save for a house.
Tailor your savings goal
Your savings goal is not a one-size-fits-all answer, as home prices vary intensely from state to state and city to city. The type of property you want to purchase – whether it’s a condo or a single-family home – also makes a difference. Spend some time browsing recently sold properties in your area on Zillow. This will give you a starting point.
Once you have an idea of what properties similar to what you would like to buy cost, you can set your goal. It’s crucial to prepare for all the expenses associated with a home purchase – not just the down payment. Here's a breakdown of the key costs:
You’ve probably heard the magic number – 20% – your entire life. Depending on the cost of homes in your area, the idea of saving 20% can make homeownership feel wildly out of reach. The good news is that you don’t have to save 20%. While a 20% down payment can help you avoid private mortgage insurance (PMI) and potentially secure better mortgage terms (such as lower interest rates), many buyers successfully purchase homes with less. In fact, the average first-time home buyer in 2022 put down just 6%. Meanwhile, an existing homeowner looking to purchase a vacation home or investment property will need to put down at least 10%.
Programs like FHA loans and USDA loans are designed to help more home buyers achieve their goals with less money down.
Closing costs are the fees and expenses you pay when you finalize the purchase of your home. These can include appraisal fees, title searches, credit report fees, and more. Generally, closing costs range from 2% to 5% of the purchase price. For example, on a $500,000 home, with a 7% down payment, closing costs would be around $18,000. You can look at a variety of closing cost scenarios using an online calculator. Some of these costs are fixed, but others can vary between lenders, so you’ll be able to shop around for the best deal.
Some closing costs, such as title insurance (which protects you in the event of potential legal issues related to the ownership of your new home), are not required – but are highly recommended.
The cost of moving can vary greatly. Local moves may only require renting a moving van and some supplies, while long-distance moves – such as a move from a higher cost-of-living area to somewhere with more affordable home prices – can involve significant logistics and higher costs. Take your relocation costs, including movers, packing materials, and storage, into consideration when deciding your home purchase savings goal.
Depending on the real estate market in your area, when you start your home purchase journey, you may have the opportunity to order home inspections as part of your purchase transaction. Home inspections can help you make sure that you’re not buying a home with costly issues that you’ll have to pay to fix before you can enjoy your new property. Inspections also serve as a valuable negotiation tool during a buyers' market, helping fold the cost of necessary repairs into your purchase price. Home inspection costs can vary depending on square footage and location.
Maintenance, repair, and unexpected expenses
While you may be purchasing a home that’s move-in ready, the reality is that many homes will need some level of work. Budgeting for these expenses in advance will help ease the stress of starting off your life in your new home. The average homeowner spends 1-4% on maintenance per year – if you’re purchasing a fixer-upper or an older home, this cost can be much higher.
Other unexpected expenses when purchasing a home can include overlap – such as a month or two where you have to pay your mortgage on your new home as well as your rent or mortgage on your previous dwelling. Keep this in mind when setting your savings goal. Remember, your home purchase should not clean out your savings completely – you still need to maintain a robust emergency fund after the transaction is complete.
How to save money for a house
While all the costs outlined above can seem overwhelming, saving for a house is possible – even if you’re trying to save for a house while renting. Once you know how much to save for a house, it just takes a solid savings strategy and a good dose of discipline.
Build a new, more frugal budget
Now that you’ve answered the question of “how much,” you can tackle the question of “how long.”
- Evaluate your existing budget – This will help you identify areas where you can cut back. Be honest with yourself about where your money is going today, and be realistic about how much you can cut back.
- Live below your means – Set a new budget that allows you to contribute to your home savings monthly. In order to save effectively, you’ll need to prioritize saving over spending and embrace frugal living. Shop with discounts, cook at home, and avoid impulse purchases. Cut back on unnecessary subscriptions.
- Hold yourself accountable – Develop strategies to ensure that you stick to your budget, whether that’s connecting with an accountability partner online or in your social circle, rewarding yourself for meeting your goals, or creating reminders about your commitment to buying a new home.
Automate and grow your savings
It’s crucial that you make saving for your goal as easy as possible.
- Create dedicated accounts – Create a new account, whether it’s a savings account with your bank, a new brokerage account, or both. This will help you track your savings and stay motivated.
- Automate your savings – Set up an automation that moves funds into your designated account(s) monthly when you get your paychecks. This will help minimize the thought and willpower required to follow through on your savings commitments.
- Optimize your account types – Make sure the savings account you set up for your goal is a high-yield savings account, which will help your contributions grow faster. If you’re opening a new brokerage account, make sure it comes with a sign-up bonus.
- Utilize stocks and bonds – Help your home savings grow faster by investing in bonds, ETFs, and stocks. Make sure to manage your risk profile to ensure that your account balances are going up and not down.
- Consider a Roth IRA – A Roth IRA can offer tax advantages for growing investments, and you can pull funds out for a first-time down payment with no penalty. Confer with a financial advisor about whether using your Roth IRA to save for a house makes sense for you.
Reduce your major expenses
To really move the dial on your savings goals, you’ll need to make changes where they really matter.
- Reduce your housing expenses – Unless you’re living rent-free with family, housing is likely your most significant expense. There are a number of ways to drive this cost down, whether that’s moving to a less expensive apartment in a less expensive area, bringing in an additional roommate, or renting out part of your property if you’re already a homeowner.
- Cut down on transportation costs – Use public transportation if possible, carpool, or consider a more fuel-efficient vehicle to reduce commuting costs. Walking and biking, when possible, can both reduce your costs and improve your health.
- Keep your utilities down – Be strategic about your utility costs, turn off the lights when you leave a room, and think about things like when you run the laundry or dishwasher. Look for opportunities to make low-cost changes like putting in high-efficiency bulbs.
- Control your food and grocery budget – Plan meals, shop with a list, and avoid the temptation to order out on a regular basis. With food costs at an all-time high, this is a huge area of opportunity for your savings. Include lower-cost meals in your weekly plans.
- Enjoy low-cost leisure activities – Find free or low-cost activities in your area. Get outside, participate in community events, and see what your local library has to offer. Living frugally does not have to mean living a dull life.
Increase your income
Cutting costs is just one-half of the savings equation – increasing your monthly income can increase your housing power.
- Add a side hustle or freelance gig – Supplement your income by exploring opportunities that align with your skills and interests, like freelancing, tutoring, starting a small business, or a part-time second job.
- Rent out unused space – If you have extra space like a garage or even a driveway, consider renting it out for additional income. If you have a spare room, list it on Vrbo or Airbnb.
- Be mindful of regulations – Ensure you comply with local regulations and have proper legal agreements in place.
Reduce your outstanding debts
Your mortgage rate will make a difference in how much you can afford to spend on a new home. To get the best possible rate – and to determine whether you can get approved for a conventional mortgage or an FHA loan in the first place – you’ll need the best possible credit score.
- Understand your debt-to-income ratio – This ratio plays a crucial role in mortgage approvals. A bank takes a risk when they lend you money – the higher your outstanding debts, the higher the risk. Lowering your debt enhances your loan eligibility.
- Prioritize debt repayment – Focus on paying off high-interest debts first, balancing debt repayment with saving for your house.
- Explore debt consolidation options – If you have a significant amount of debt, look into what resources are available to settle your outstanding accounts and lower your interest rates.
Leverage existing assets
If you have assets already, explore how you can use them to augment your savings goals for your home purchase.
- Stock portfolios – Many home buyers, especially those purchasing for the first time, liquidate stocks in order to finance their down payment. If you have investments, plan what you may want to sell off when the time comes to purchase your home. Be mindful of capital gains and other tax implications.
- Home equity – If you're already a homeowner, consider tapping into your home equity for a down payment on your next house or investment property.
By adopting these strategies, you'll be well on your way to saving efficiently for your dream home. Remember, it's about balance – managing expenses while finding ways to grow your savings and income.
Homeownership is more than just a dream – it’s a financial goal that can be a key part of your strategy for building long-term wealth. If you work towards this milestone with an eye toward the future, you’ll find that reducing your expenses and increasing your earning power might be easier than you imagined. With the correct home saving goal and the right strategy for saving money for a house, you’ll be holding the keys to your new home before you know it.