The down payment is the starting point, but it is not the only cost
The amount you need to save depends on three separate numbers: the down payment, closing costs, and reserves for emergencies after you buy. Most people focus only on the down payment and run short when the other two arrive.
A down payment of 20 percent of the home price is the traditional target because it lets you avoid mortgage insurance. If you are buying a $300,000 home, that is $60,000. But you will also owe closing costs (typically 2 to 5 percent of the loan amount) and you should keep 3 to 6 months of mortgage, property tax, insurance, and maintenance costs in the bank after closing. The total is often 25 to 30 percent of the home price, not 20 percent.
The exact number depends on your local home prices, your income, the loan program you choose, and how much financial cushion you want. There is no single right answer, but there is a way to calculate the right answer for your situation.
Key Takeaways
- Down payments range from 3 percent to 20 percent of the home price depending on the loan program, and lower down payments require you to pay mortgage insurance until you reach 20 percent equity.
- Closing costs typically run 2 to 5 percent of the loan amount and cover appraisals, title searches, inspections, and lender fees — these are separate from the down payment.
- You should save 3 to 6 months of housing expenses (mortgage, property tax, insurance, maintenance, HOA fees) as an emergency fund after you close, because homeownership has unexpected costs.
- The total amount to save is usually 25 to 30 percent of the home price if you want a 20 percent down payment plus closing costs plus reserves, but lower down payment programs reduce this to 10 to 15 percent.
- Your actual target depends on your local home prices, your monthly income, and which loan program you plan to use — a mortgage lender can tell you the exact number once you are ready to discuss a loan.
How down payment size affects what you pay each month
The down payment you make determines whether you pay private mortgage insurance (PMI), which is an extra monthly charge that protects the lender if you default. If you put down less than 20 percent, you pay PMI until your home equity reaches 20 percent. On a $300,000 home with a 10 percent down payment ($30,000), PMI might add $150 to $300 per month to your mortgage payment.
Conventional loans (the most common type) typically allow down payments as low as 3 percent. Federal Housing Administration (FHA) loans allow 3.5 percent down but charge mortgage insurance for the life of the loan, making them more expensive over time if you plan to stay in the home for many years. Veterans Affairs (VA) loans and United States Department of Agriculture (USDA) loans allow 0 percent down if you meet their requirements, but they have their own fees and restrictions.
The trade-off is simple: a smaller down payment means you save money now but pay more each month. A larger down payment means you save money over the life of the loan but need more cash before you buy. The right choice depends on whether you have the cash available and whether you would rather invest that money elsewhere.
Closing costs are a separate bill due at signing
Closing costs are the fees charged by the lender, the title company, the appraiser, the inspector, and the local government. They typically range from 2 to 5 percent of the loan amount (not the home price). On a $270,000 loan (a $300,000 home with a 10 percent down payment), closing costs might be $5,400 to $13,500.
These costs cover specific services: the appraisal ($400 to $600), the home inspection ($300 to $500), the title search and insurance ($500 to $1,500), the lender's origination fee (often 0.5 to 1 percent of the loan), property taxes and insurance prorated to your closing date, and recording fees charged by the county. You receive an itemized list called the Closing Disclosure at least three business days before closing, so you can see exactly what you owe.
Some closing costs can be negotiated or paid by the seller, depending on local custom and market conditions. Ask your real estate agent or mortgage lender what is typical in your area. But plan to have the full amount available unless you have a written agreement that the seller will cover part of it.
Emergency reserves protect you from the first major repair
Homeownership has costs that renters do not face. A roof lasts 15 to 25 years, a water heater lasts 10 to 15 years, and an air conditioning system lasts 10 to 20 years. When any of these fail, the repair or replacement can cost $5,000 to $15,000. If you have no savings left after closing, you will have to borrow money or go without.
Financial advisors typically recommend keeping 3 to 6 months of housing expenses in a savings account after you close. For a household with a $2,000 monthly mortgage payment, $400 in property taxes, $150 in insurance, and $200 in maintenance reserves, that is $2,750 per month, or $8,250 to $16,500 in the bank. This is separate from your down payment and closing costs.
If you cannot save this much before closing, save what you can and build the reserve over the first year of homeownership. But know that you are taking on risk — a major repair in month two could force you to use a credit card or home equity line of credit at a high interest rate.
Calculate your target based on the home price you are aiming for
Start with the home price you can afford based on your income and the loan programs available to you. A mortgage lender can tell you the maximum loan amount you may have access to for, which depends on your debt-to-income ratio (typically 43 to 50 percent of your gross monthly income). If you earn $5,000 per month, you can usually borrow $215,000 to $250,000.
Once you know the home price, work backward to find your savings target. If you want a 20 percent down payment, closing costs of 4 percent of the loan, and 6 months of reserves, the math looks like this:
| Item | Calculation | Amount |
|---|---|---|
| Home price | Your target | $300,000 |
| Down payment (20%) | $300,000 × 0.20 | $60,000 |
| Loan amount | $300,000 − $60,000 | $240,000 |
| Closing costs (4%) | $240,000 × 0.04 | $9,600 |
| Monthly housing cost | Mortgage + tax + insurance + maintenance | $2,500 |
| Emergency reserves (6 months) | $2,500 × 6 | $15,000 |
| Total to save | Down payment + closing + reserves | $84,600 |
If a 20 percent down payment feels out of reach, recalculate with 10 percent down and mortgage insurance. The down payment drops to $30,000, but you add PMI to your monthly housing cost, which increases your emergency reserve. The total to save might be $55,000 to $65,000 instead of $84,600 — a real difference, but still substantial.
Where to keep money you are saving for a house
The money you are saving for a down payment should be in a place where you can access it within a few months to a few years, where it will not lose value, and where it will earn some interest. A high-yield savings account is the standard choice because it offers interest rates of 4 to 5 percent (rates vary by bank and change over time), you can withdraw the money without penalty, and the account is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
A certificate of deposit (CD) pays a higher interest rate (often 4.5 to 5.5 percent) if you lock the money away for a fixed term (3 months to 5 years). If you know you will not buy for at least two years, a 2-year CD might earn you an extra $1,000 to $2,000 compared to a savings account. But if you withdraw early, you pay a penalty that can wipe out the extra interest, so only use a CD if you are confident about your timeline.
Do not put down payment money in the stock market, even in a low-cost index fund. The stock market can drop 20 to 30 percent in a year, and if that happens the month before you plan to close, you will have to delay your purchase or reduce your offer. Keep this money safe.
How to speed up your savings timeline
If your target feels far away, the fastest way to close the gap is to increase your income or reduce your housing target. Increasing income might mean asking for a raise, taking a second job, or waiting until your salary naturally increases. Reducing your housing target might mean looking in a different neighborhood, buying a smaller home, or waiting for home prices to fall in your market.
You can also reduce your savings target by accepting a lower down payment. A 10 percent down payment instead of 20 percent cuts your savings need by roughly $30,000 on a $300,000 home, though you will pay PMI each month. A 5 percent down payment cuts it further, but PMI becomes more expensive. Run the numbers with a mortgage lender to see which trade-off makes sense for your situation.
Some first-time buyers use gifts from family members to cover part of the down payment. If you receive a gift, the lender will ask for a letter from the gift-giver stating that the money does not need to be repaid. The gift counts toward your down payment, but you still need to save your own money for closing costs and reserves.
Frequently Asked Questions
Can I use my retirement account to save for a down payment?
Some retirement accounts allow withdrawals for a first home purchase. A traditional or Roth IRA lets you withdraw up to $10,000 lifetime for a first-time home purchase without the usual 10 percent early withdrawal penalty, though you will still owe income tax on the withdrawal from a traditional IRA. A 401(k) may allow a loan against your balance, which you repay to yourself with interest. Talk to your plan administrator about the rules before you withdraw, because the rules vary by account type and employer.
What if I cannot save 20 percent down?
Most buyers put down less than 20 percent. You can buy with 3 to 10 percent down on a conventional loan, 3.5 percent on an FHA loan, or 0 percent on a VA or USDA loan if you meet the requirements. The trade-off is that you pay mortgage insurance or higher interest rates. A mortgage lender can show you the monthly cost difference between a 10 percent down payment and a 20 percent down payment so you can decide which fits your budget.
Should I delay buying to save more money?
That depends on whether home prices and interest rates are rising or falling in your market. If prices are rising faster than you can save, buying sooner with a smaller down payment might be cheaper than waiting. If prices are falling or flat, waiting to save more gives you more negotiating power and lower monthly payments. A real estate agent or mortgage lender in your area can tell you the trend in your market.
Can the seller pay my closing costs?
Yes, in many markets the seller pays part or all of the buyer's closing costs as part of the negotiation. This is called a seller concession. The amount the seller can pay is limited by the loan program — typically 3 to 6 percent of the home price — and it reduces the amount of cash you need at closing. Ask your real estate agent what is typical in your area and whether the seller is willing to cover closing costs.
How do I know if I am saving enough?
Once you have a specific home price in mind and a loan program selected, a mortgage lender can tell you the exact amount you need at closing. They will give you a Loan Estimate that shows the down payment, closing costs, and any other fees. Add your emergency reserve to that number, and you have your target. If the number feels too high, talk to the lender about lower down payment options or ask whether any closing costs can be reduced.