How Much Should You Save Before Buying Your First Home?

  • Home Owner
  • 02/24/21

All the costs associated with buying a first home and what you can expect to spend depending on where you buy.
Are you ready to finally settle down and invest in buying a home? There are plenty of benefits of becoming a homeowner, including building equity, improving your credit, and securing a stable monthly payment. To get the best interest rate and maximize your investment, though, you need to put a down payment on your home when you purchase it. In addition to the down payment, you also need to cover closing costs and expenses involved with moving.
The ideal amount of money you should save before you buy your first home depends on your personal situation, where you’re buying, and the price of the home and can vary widely from buyer to buyer. These general considerations will at least give you a ballpark idea of how much you need to save before you start looking at homes for sale. 

The Down Payment

You’ve likely heard the rule of thumb that you should have 20% to put as a down payment on a home. This isn’t mandatory for every buyer, though. Experts generally agree that you should have at least 5% of the cost of the home saved to use as a down payment, and the average homebuyer puts down 6%. The amount you have to put down is determined by the loan type. A conventional loan usually requires 3% to 5% down, while an FHA loan only requires 3.5%. Some loans, like those offered by the VA, don’t require any down payment.
However, just because you’re not required to put 20% down doesn’t mean you shouldn’t. In most cases, you will have to secure mortgage insurance if you don’t put 20% down on a new home. Mortgage insurance is incurred when the loan-to-value ratio is higher than 80%. The amount you pay is based on your credit score, as well as the size of your down payment, and is normally in the 0.3% to 1.15% range. This can mean an extra few hundred dollars on your monthly mortgage payment until you get the loan-to-value ratio down to 80%.
If you can, it’s always a good idea to put at least 20% down on your first home to avoid the extra cost of mortgage insurance. But if you don’t have that much in the bank, it doesn’t mean you’re out of luck. Many first-time homebuyers talk with their real estate agents and agree that paying a bit more per month for mortgage insurance is worth it after taking all the benefits of homeownership into account.

Associated Costs

The down payment is usually the first thing homebuyers think of when it comes to the costs of buying a house. There are other costs you need to account for in addition to the down payment, however. Here are the most important:

  • Origination, underwriting, and application fees.

  • Title-based fees.

  • Survey and appraisal fees.

  • Prepaid property taxes, homeowner’s insurance, and interest.

  • Escrow fees.

  • Mold and pest inspections.

  • Moving fees, including storage boxes, moving trucks, movers, taking time off work, and other associated costs.
These can add up to another $2000-$3000 depending on where you’re buying, the cost of your home, and your personal financial situation. When talking with your realtor and mortgage specialist, always ask for a detailed account of the costs associated with buying the home you want so you can be prepared.

What This Translates to in Different Parts of the U.S.

Costs to buy a home vary depending on where you are buying the property due to the average cost of homes themselves and associated local fees. Here are a few examples of what it might cost to buy a first home in different parts of the country.
  • New York City. In New York City, a 20% down payment is the standard for purchasing an apartment. If you’re looking at a property in low demand, you may be able to get away with less, but you should plan on 20%. In addition to your down payment, expect to pay another $2,500-$3000 in bank fees, $2500-$3000 in attorney fees, $2000 for building fees, up to $4500 for title insurance, and a possible mortgage recording tax of around 1.9% for condos or townhouses. All in all, if you’re purchasing an apartment for sale in New York that sells for $670,000, you should plan to save at least $150,000.

  • Los Angeles. The median price of a single-family home in Los Angeles is $650,000. To avoid mortgage insurance, that means a down payment of $130,000. With added costs for escrow fees, title insurance, mortgage origination, underwriting, flood certification, property taxes, hazard insurance, and possible HOA dues, you should be prepared to save 2 to 3% of the home’s selling price. This translates to an additional $19,500 for a total of around $149,000.

  • Chicago. You won’t pay as much for Chicago real estate, with the median sale price sitting at $325,000. That translates to a $65,000 down payment to avoid mortgage insurance, another 2 to 3% of the home’s cost for closing fee loan origination fees, and City of Chicago Transfer Tax Stamps. All in all, you will need to have approximately $74,750 in hand to buy your first home in the windy city.

  • Omaha. You’ll save even more if you buy a home in middle America. The average home sells for $212,467 in the largest city in Nebraska, making a 20% down payment of a mere $42,493. Add in the expected closing costs of around $2300, and your total is still under $45,000.
Buying a home is certainly not an inexpensive process, and it can be very frustrating and disappointing if you’re not sure what to expect when you begin the journey. By being aware of the typical down payment and closing costs of a home, you can be prepared and able to find a home that you and your family will love for years to come.

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