This Is How Much Money You Actually Need for a Down Payment on a House

Photo credit: andresr - Getty Images
Photo credit: andresr - Getty Images

From House Beautiful

You've scoured Zillow, found The One, and plotted out the full renovation of that dreamy little cottage in your imagination. What next? Before making an offer on a new home, you'll want to sort out exactly how much it will cost—beyond the sticker price. For starters, unless you’ve got hundreds of thousands of dollars stacked up in the bank to buy the house all cash, you’ll need a mortgage to get your foot in the door. But that's just the beginning. So how exactly do you finance what’s likely to be the biggest purchase of your lifetime? Ahead, the real costs of home-buying.

As you crunch the numbers to determine whether you can afford a purchase, consider the two major cost categories: buying and owning. (Yes, there are significant costs that come up even after the purchase is complete!)

The Costs of BUYING a Home

Down Payment

Nearly all loan programs require you to pony up some cash for a down payment, which is the portion of the purchase price that you'll pay out of pocket (versus from a lender) up front. Twenty percent is the gold standard—so, $75,000 for a $250,000 house; ponying up this much will help you avoid mortgage insurance, but more on that to come—but it's also possible to pay less. In fact, the median down payment for first-time buyers is 6 percent according to the National Association of Realtors. Some loan programs allow for even less of a down payment, like Federal Housing Administration loans that require 3.5 percent. And because down payments can be a major hurdle to homeownership, states have down payment assistance grants available to qualifying first-time buyers. (Check them out here.)

Also, as part of a housing plan President Joe Biden touted on the campaign trail, first-time buyers could soon receive $15,000 in assistance to help shore up a down payment. Don’t get your hopes up just yet, though: The idea for a tax credit, if it comes to fruition, could go through several revisions and would ultimately need Congressional approval.

Closing Costs

Brace yourself for fee fatigue: Buying a home comes with a lot of them, including costs for an appraisal, home inspection, title search, upfront property taxes, and many more. Closing costs is the umbrella term for all these fees. “Closing costs are typically a shock to most new homeowners,” says Steve Sexton, financial consultant and CEO of Sexton Advisory Group. To prepare yourself to cover these costs, budget between 2 to 5 percent of your home’s value, Sexton says.

Pro Tip:
“Ask your lender for closing cost estimates early—and often,” says Kate Ziegler, a realtor with Arborview Realty in Boston.

As an example, if you’re buying a home for $300,000, you’d need between $6,000 to $15,000 to close on your loan. Often, buyers roll these costs into their home loan, but that does mean you’ll be paying interest on them. These costs can be contingent on a number of factors, says Ziegler, including the timing of the purchase, the loan product, the location, and type of home.

Photo credit: Hearst Owned
Photo credit: Hearst Owned

The Costs of OWNING a Home

Mortgage

Unless you pay cash, plan to make a lump sum mortgage payment each month. This payment has a few components: In addition to the principal and interest you’re paying on the loan, you’ll also be covering taxes and insurance. Most lenders require you to have an escrow account, and then the bank pays property taxes and insurance premiums on your behalf from your escrow balance. It streamlines payments for you and protects your lender by making sure these bills don’t go forgotten. Also, if you put less than 20 percent down on your home, you’ll likely have to pay mortgage insurance, which protects your lender (not you) should you default on your loan.

You can expect to pay from $30 to $70 every month in mortgage insurance for every $100,000 you borrow, according to Zillow.

Additional Costs

In addition to your mortgage payment, you’ll want to factor in additional costs like homeowner’s association fees if you’re buying in a neighborhood that has an HOA, utilities, Sexton says, and some lesser-known costs that can pop up like HOA assessments that pay for maintenance projects.

As you’re budgeting for a home, your housing costs shouldn’t exceed 25 percent of your total monthly income, Sexton recommends. This is a good rule to keep in mind because your lender may approve you for a higher loan amount than you’re comfortable paying.

Prepared to take the next step? Here's how to qualify for a mortgage and the five most popular home-buying loans.

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