Saving for a Down Payment Guide
Know How Much House You Can Afford
A house is one of the largest purchases you’ll ever make. That’s why smart home buyers like you save up the biggest down payment they can to limit the amount they have to borrow and pay off their house as fast as possible. To get there, set up your savings goal for success by following these steps first:
- Pay off all debt. Debt is a ball and chain. Trust us, it’ll be so much harder to save for a house with debt strapped to your budget. Plus, adding a mortgage on top of your other debts could put you one emergency away from bankruptcy—yikes. Don’t make this mistake. Put all your focus into dumping debt first!
- Maintain an emergency fund. No matter how determined you are to save for your house, emergencies happen. Don’t let a job loss or a car breakdown keep you from your savings goal, or worse—cause a crisis after you’ve bought a home. Build and maintain a full emergency fund of 3–6 months of expenses before you save for a down payment. And don’t rob your emergency fund for your down payment. Hear us loud and clear: You’re going to need that emergency fund to protect you from all that can go wrong as a homeowner.
- Know how much house you can afford. There’s no point in setting a down payment goal until after you know how much house you can afford. Never get a mortgage with payments that are more than 25% of your monthly take-home pay—including principle, interest, property taxes, home insurance, homeowners association (HOA) fees and private mortgage insurance (more on this later).
Do the Math
Okay, let’s calculate how much house you can afford. This is simple math, people. Just add up your total monthly take-home pay (after taxes) and multiply that by 25%. For example, if your total household income after taxes adds up to $7,000 each month, take 25% of that income to get a maximum monthly payment of $1,750.
After that, use our mortgage calculator to find the maximum house price you can afford. To save the most money on your mortgage in the long run, choose a 15-year fixed-rate conventional loan with a down payment that’s at least 20% of the total house price—to avoid paying that private mortgage insurance (PMI) we mentioned earlier. PMI is insurance that covers your lender (not you) if you stop making mortgage payments.
If you’re a first-time home buyer, a smaller down payment of 5–10% is okay too—but then you will have to pay PMI. In any case, stay away from expensive mortgages that’ll keep you in debt for decades—like VA, FHA, USDA and 30-year loans! Enter your down payment amount into the calculator and test out different house prices within your budget.
For example, let’s say you use our mortgage calculator and select a 15-year fixed-rate mortgage at a 4% interest rate with a 10% down payment. Let’s also assume your mortgage payment includes a 0.5% PMI fee, 1.1% property tax, a $846 home insurance premium, and an $86 HOA fee. After you test out different prices based on your $1,750 maximum mortgage payment, you find that the maximum home price you can afford is about $200,500. Woo-hoo!
But remember: This calculation shows you the maximum house price you can afford—meaning you don’t want to buy a house above that price. It’d be smarter to find a house below that price to allow room in your budget for ongoing homeowner costs like maintenance and repairs.
So, before you take one more step, use our calculator to figure out your maximum house price. You’ll need that number for our next chapter.