Before you start saving, consider your timeframe. Do you want to purchase a house in the next year, 5 years, or 10 years?
Using the previously aforementioned $200,000 home, you would need $40,000 for your down payment. A longer timeframe allows for smaller savings per year. For example, to Kate Meckler buy a house in 5 years, you must save $8,000 per year. To buy the house in 10 years, you would only need to save $4,000 per year to make the same down payment.
Your ultimate goal for down payment savings is to avoid PMI. Keep in mind that you may also need money for closing costs and an emergency fund. Whether you decide to go with a longer or shorter timeframe, there is no better time to start saving than now.
How Much House Can You Afford?
In our article, How Much House Can I Afford, we go into detail about how to precisely figure out what you can afford.Before you start saving, it also helps to know how much you need for your mortgage. If you plan on purchasing a home in the next few years, you can use today’s income to determine what you can afford. If your income increases, your ability to pay your mortgage only improves. You do not have to stick to this number when you actually purchase a home though. If life causes your budget to change, then you accommodate accordingly. In the mean time, it gives you a concrete figure to plan around.
Our general recommendation? Spend no more than 28% of your gross monthly income on your mortgage payment.
$6,256 x 0.28 = $1,752 (maximum total monthly mortgage payment)
If you estimate property taxes for your area at around $5,000 and annual homeowner’s insurance at $950:
$5,000/12 (months) = $417 (monthly taxes)
$950/12 (months) = $79 (monthly insurance)
$1,752 – $417 (taxes) – $79 (insurance) = $1,256 per month for principal and interest (mortgage payment)
Assuming a 5% interest rate, you can estimate your mortgage payment to be $550 for every $100,000 you borrow.
$1,256/$550 = 2.28
$100,000 x 2.28 = $228,000 mortgage
Once you know this amount, you can determine how much you want to save. This will give you the total amount of house you can afford. If you can save 20% in this example, you could purchase a $275,000 home with a $55,000 down payment.
WHAT IS A DOWN PAYMENT?
As in the above example, let’s say you purchase a $200,000 home. If the lender requires a 20% down payment, you would calculate it as follows:A seller receives money from two places at closing – your down payment and the funds from your mortgage. Lenders usually refer to the down payment as a percentage. A 20% down payment means 20% of the purchase price of the home. The remaining funds you need to purchase the home come from your mortgage.
$200,000 (sales price) – $40,000 (down payment) = $160,000 (loan)
HOW MUCH DOWN PAYMENT CAN YOU AFFORD?
However, it does not mean you have to put that much down for your down payment. Your timeframe and ability to save determine how much you can save. There are programs that allow smaller down payments. However, with a lower percentage, you must include mortgage insurance, which will take away from how much house you can afford.The standard is a 20% down payment.