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If you want to buy a home, you’ll need to know how to save for the biggest upfront cost — the down payment. Some loans don’t require any down payment, but you’ll typically need at least 3%. If you can put down 20%, you won’t have to pay private mortgage insurance (PMI).
Here’s what you need to know about saving for a down payment:
- How much to save for a down payment
- How long it takes to save for a down payment
- Where to keep your down payment savings
- 5 ways to save for a down payment
- Other homebuying costs to save for
How much to save for a down payment
Among all buyers, the median down payment is 12%, according to the National Association of Realtors. However, this figure includes repeat buyers, not just first-time buyers, and repeat buyers often put equity from their current home toward the down payment for their next home.
Minimum down payment by mortgage type
|Loan type||Description||Min. down payment|
|Conventional||No PMI. Credit-worthy borrowers with significant savings and/or gift funds||20%|
|FHA (Government-insured)||Government-insured mortgage for borrowers with low credit scores||3.5% or 10%
(depending on credit score)
|VA (Government-backed)||Government-backed mortgage for active military, veterans, and qualified members||0%|
|USDA (Government-backed)||Very-low to moderate-income applicants in eligible rural areas||0%|
You may also want to consider more flexible loan options, such as Fannie Mae’s 97% LTV Standard or Freddie Mac’s Home Possible mortgage.
These mortgages are geared toward low- to moderate-income borrowers and first-time homebuyers, and they only require 3% down.
Putting zero down
Zero-down mortgages can be incredibly appealing, especially to first-time buyers. But, as economists like to say, there’s no such thing as a free lunch. The consequences of putting 0% down include:
- Higher monthly payments
- Paying more interest over the life of your loan
- Ending up with negative home equity if the market declines
- Possibly, a higher mortgage rate
Putting down more than required
For comparison, here are some benefits of putting down more than you’re required to:
- Lower monthly payments
- Paying less interest over the life of your loan
- Potentially avoid paying private mortgage insurance
- Having home equity from day one
- Possibly, a lower interest rate
With Credible, the pre-approval process is simple. You can generate a streamlined pre-approval letter in just a few minutes, and Credible’s interactive pre-approval tool will help you figure out how much home you can afford.
How long it takes to save for a down payment
How long it will take you to save a down payment depends on how expensive that home will be and how much disposable income you have.
Here’s what you need to save monthly over the course of one to three years to hit various down payment goals:
|Purchase price||Down payment goal||Monthly savings for 12 months||Monthly savings for 24 months||Monthly savings for 36 months|
Where to keep your down payment savings
As with any savings goal, the account that will hold your down payment savings should preserve your principal and help it keep pace with inflation.
You’ll want to opt for lower-risk plays like high-yield savings accounts or certificates of deposit. Let’s talk about your options in more detail.
- Upsides: Safe and reliable
- Downsides: Poor interest rates
A standard savings account is a middling place to keep your down payment. It’s better than saving large sums of cash at home: it can’t be lost, stolen, or damaged.
However, the interest rates on regular savings accounts are almost zero, so your savings could actually lose value slightly because of inflation.
High-yield savings account
- Upsides: Higher interest rates than regular savings accounts
- Downsides: Not available at every bank
A high-yield savings account has the same benefits as a standard savings account but pays a higher interest rate.
You may not find these accounts at the big brick-and-mortar banks, but there are many online banks with excellent reputations and long track records that offer them. Some brokerage firms also offer them. Make sure that whichever type of savings account you choose, it does not have a monthly fee.
Certificates of deposit
- Upsides: Stable and come in different term lengths
- Downsides: Might have to pay a fee to withdraw early and returns are relatively low
Certificates of deposit are very safe; they’re FDIC-insured and pay a guaranteed interest rate. They also come in many varieties:
- No-penalty CDs let you cash out your CD at any time without paying an early withdrawal penalty
- Rate-increase CDs let you get a higher interest rate without opening a new CD if rates go up during your CD term
- High-yield CDs pay above-average interest rates but charge an early withdrawal penalty if you cash out before the term is up
You can invest in multiple CDs as you save for your down payment and time them to all mature by the date when you plan to buy a home. For example, you might hold a two-year CD, an 18-month CD, and a 12-month CD simultaneously.
- Upsides: Don’t have to pay income tax or early withdrawal fees on a 401(k) loan
- Downsides: Taking a distribution reduces earning potential of your retirement accounts
Retirement accounts have provisions that allow certain homebuyers penalty-free withdrawals before retirement age. For example, if you want to use your 401(k) for a down payment, you can either borrow from it or take a hardship distribution.
Here’s a quick breakdown of these two options:
- A 401(k) loan must be repaid, with interest. You can borrow up to $50,000 or 50% of your vested account balance, whichever is less. The loan is not taxable or subject to early distribution penalties unless you fail to repay it.
- A 401(k) withdrawal cannot be repaid. You must pay income tax on the amount you withdraw and you may have to pay a 10% early withdrawal penalty. The maximum you can withdraw is the amount needed to purchase your home.
- Upsides: Potential for larger returns
- Downsides: Investing primarily in stocks presents greater risk
The risks of saving for a down payment within a brokerage account overlap with the risks of using retirement savings for a down payment. In other words, what will you be investing in, how risky is it, and will it be worth more or less than it is today when you need that money for your down payment?
It might make sense to invest your down payment savings if you’re on the fence about buying a house and you don’t want to miss out on years of growth in the stock and bond markets.
It also might make sense if you have a very long time horizon for buying a home, like 10 years or more. The potentially large gains you make could easily cover the cost of a home.
5 ways to save for a down payment
The following strategies can help you save up for a down payment on your mortgage.
1. Set up an automated savings plan
An automated savings plan transfers money from your checking account to a designated savings account at a set time and frequency.
Prioritizing your down payment savings and moving the money to an account where it’s harder to spend may help you reach your goal sooner.
2. Keep your savings in a dedicated account
In addition to moving money automatically every so often, keeping that money in a savings account earmarked for your down payment can help you save.
You may be less likely to touch that money for other purposes, like repairing your car, if you have separate savings accounts labeled for different purposes.
Some banks make it easy to organize your savings. Ally, for example, has a “buckets” feature, which are just labeled sub-accounts within your main savings account.
3. Take up a side hustle
No one would blame you if you were sick of hearing the advice to take up a side hustle. Shouldn’t one job be enough?
But a second job really is a great way to boost your income to meet a short-term goal, like saving for a down payment. With the increased ability to work remotely and take on flexible independent contractor jobs, generating extra income has never been easier.
4. Trim your budget
Here’s an easy way to trim your budget. When you’re looking at your monthly spending in a certain category, or going through your recent purchases, ask yourself: “Would I rather have this, or would I rather own a home?” This simple question can help you prioritize your spending.
It’s OK if you don’t want to cut everything — or anything — to buy a home. Asking yourself this question repeatedly might reveal that you’re actually happier renting, and that’s fine.
Or, maybe it will reveal that you’re okay with making a drastic change like moving in with your parents or in-laws to save money.
5. Look into down payment assistance
Some people don’t have the means to save for a down payment. If that’s you, look into down payment assistance programs. They’re designed to help lower-income earners who want to buy a primary residence, and the money can come in the form of a super-low-interest loan or a grant you don’t have to repay.
Other homebuying costs to save for
While your down payment will likely be the biggest homebuying expense you have to save for, it’s not the only one.
|Closing costs||2% to 5% of the loan amount|
|Moving costs||$1,250 in state, $4,890 out of state|
|Home inspection||$280 to $400|
|Home appraisal||$300 to $500|