The home-buying process can be exciting but also overwhelming and expensive. Like most people, you probably don’t have tens of thousands of dollars sitting around in savings to put down on the house. So, how much money should you have saved before you start house hunting?
The answer to this question depends on many factors, including the type of mortgage you’re looking to get and the housing market’s current state. In general, you’ll want to save at least 10% of the purchase price before looking for a home. If you can swing 20%, that’s even better.
Why 10-20%? Mortgages typically require borrowers to put down a minimum of 5% of the purchase price. However, if you can save 10%, you’ll likely qualify for a better interest rate on your mortgage. Plus, you’ll avoid paying private mortgage insurance (PMI), an insurance policy that protects the lender if you default on your loan. PMI can add hundreds of dollars to your monthly mortgage payment, so it’s best to avoid it if possible.
Similarly, 20% is the standard down payment required by most conventional loans. If you can come up with this much money upfront, you won’t have to pay PMI. Your monthly payments will be lower than they would be with a lower down payment. That said, coming up with 20% of the purchase price can be difficult for many people. If this is the case for you, other financing options are available that only require a 3-5% down payment. This includes FHA loans and certain types of VA and USDA loans. Keep in mind, though, that loans with a lower down payment typically come with higher interest rates and/or stricter eligibility requirements.
If you’re planning on buying a house shortly, start saving now! A good rule of thumb is to aim for 10-20% of the purchase price in savings before beginning your house hunt. This will help ensure you get the best possible interest rate on your mortgage and avoid paying expensive PMI fees.