Building your home

Navigating the Path to Homeownership: How Much Money Do You Really Need?

Embarking on the journey to buy a house is an exciting milestone. It’s not just a financial investment; it’s the creation of a space that truly feels like home. But as you ponder this significant step, a crucial question inevitably arises: How much money do you need to make this dream a reality? Let’s break down the numbers so you can set a realistic savings goal for your future home.

The Magic Number: 25%

A good rule of thumb is to aim for 25% of the sale price. This encompasses your down payment, closing costs, and moving expenses. Remember, this is in addition to having a fully-funded emergency fund covering 3–6 months of your typical living expenses—a crucial step before delving into home savings.

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So, if you’re eyeing a $300,000 house, your target savings should be around $75,000.

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Tailoring Your Savings Goal

Determining the exact amount you need is a personalized endeavor. Factors like the size of the home, whether you’re a first-time buyer, and the distance of your move will influence your savings goal.

The Down Payment Dilemma

Strive for a down payment of at least 20% to avoid private mortgage insurance (PMI). This can save you substantial sums in the long run. While first-time buyers can make a 5–10% down payment, be prepared for PMI costs. Anything less than 5% can lead to excessive debt and high monthly payments.

Ensure your monthly payment, including taxes, insurance, and HOA fees, doesn’t exceed 25% of your take-home pay with a 15-year fixed-rate mortgage. This prevents overstretching your budget. Opting for a 30-year mortgage may saddle you with extra interest and debt for an additional 15 years.

Moreover, it’s advisable to pay off existing debts before venturing into homeownership. This paves the way for smoother savings and a more secure financial foundation.

The Ideal: A Cash Purchase

While it may sound unconventional, purchasing a home with cash is a powerful financial move. In fact, approximately 26% of existing homes sold in June 2023 were bought without a loan. This not only saves on interest but provides a solid financial footing.

Untangling Closing Costs

Closing costs encompass fees for services that finalize the home purchase. These typically include a home inspection, appraisal, origination fees, title insurance, homeowners insurance, and taxes. While home inspections average around $340 and appraisals approximately $360, the remaining expenses can be more substantial. In total, plan for about 3–4% of the home’s sale price for closing costs.

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Budgeting for the Move

Unless you’re able to enlist the help of generous friends and family, anticipate some moving expenses. If you’re hiring professional movers, budget around $1,700. If you choose the do-it-yourself route, renting a moving truck and packing yourself will bring costs down.

A Practical Example

Let’s consider a $250,000 house with a 20% down payment to avoid PMI:

  • Down Payment: $50,000 (20%)
  • Closing Costs: $10,000 (4%)
  • Moving Expenses: $1,650 (<1%)
  • Total Buying Costs: $61,650 (25%)

Apply these percentages to your specific situation, and you’ll be on solid ground for your homeownership journey.

Preparing for Homeownership

Once you’ve achieved your savings goal, partnering with a reliable real estate agent is the final step. Our RamseyTrusted program connects you with high-performing agents in your area who are dedicated to helping you find the perfect home.

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