How Much Money Do You Need to Buy a House?
When it comes to preparing for a home purchase, different sources offer varying guidance on how much you should save. Most recommend setting aside between 5% and 25% of the home’s purchase price to cover your down payment and other up-front costs. The right amount for you depends on the size of the down payment you plan to make and those other up-front expenses. If you’re planning to buy a $350,000 home, that translates to a savings goal between $17,500 and $87,500.
Why so much? Several key costs factor into the total.
Down payment, closing costs and more
Your down payment is typically the largest up-front cost. How much you put down is up to you and your loan type. Some conventional loans require as little as 3% down — just $10,500 on a $350,000 home. But if you want to avoid having to purchase private mortgage insurance, which protects your lender if you miss payments, you’ll need to put at least 20% down. To buy that same house, you would need to have $70,000 in savings.
You’ll also pay closing costs — the fees charged by your lender and third-party providers to finalize your loan. These typically range from 3% to 6% of your loan amount. If you’re borrowing $330,000, expect to pay between $9,900 and $19,800.
On top of that, you’ll need to prepay some ongoing expenses, including part of your first year’s homeowners insurance, property taxes, mortgage insurance and mortgage interest. These costs vary by state and loan size but often total another 2% to 6% of the loan. On a $330,000 loan, that’s between $6,600 and $19,800.
Don’t forget cash reserves
As you can see, buying a home takes more than just a down payment. That’s why it’s important to start saving early. Planning ahead can put you in a stronger position when you’re ready to buy.
Many lenders want reassurance that you’ll still be able to make payments if something unexpected happens. That’s why they may require you to have cash reserves. These are savings after closing large enough to cover two to six months of mortgage payments. If your monthly payment is $3,000, that means having $6,000 to $18,000 in the bank after you’ve paid your other expenses.
These numbers are only guidelines. A trusted financial adviser can help you estimate what you’ll need based on your specific goals and situation.
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