How to save for a home in 5 steps

How to budget and save for a home down payment

Maybe you binge-watch home-improvement shows and regularly double-tap “before and after” home-design shots on Instagram. Or regularly stare at the walls of your rental, imagining what you could do with them if they were yours. You may be itching to buy your own place. However, what those TV shows and perfectly filtered images are missing is a tutorial on exactly how to save for a house.

The median U.S. home price1 is now just over $330,000. So what’s the key to saving for a down payment while you’re also paying your bills and possibly making student loan and car payments as well? The answer is that saving for a house can be doable if you have a plan.

Here’s a 5-step approach to get you started saving for a house:

1. Decide what you'll spend on a house

This one’s a bit of a personal choice. You may need to choose your target price based on the area you want to live in, details about the type of home you want and how much you’re comfortable spending on a monthly mortgage payment. This step will help you understand how much you need to save and possibly how long it will take you to begin saving for a house.

Mortgage lenders and online mortgage calculators can help you decide the absolute maximum you can afford to spend on your house. One good rule of thumb for keeping your home payment affordable is the 28% rule2: Ideally, your monthly home costs (including loan payment, property taxes and homeowners insurance) should take up no more than 28% of your gross take-home pay. Your gross pay is your monthly paycheck amount before taxes and deductions are taken out.

Remember: You’ll want to be able to save for other things even after you buy your house. It’s no fun to put every extra cent into your home and have nothing left over for dinners out and vacations. That’s called being “house poor”—when you are able to pay for your house, but otherwise you’re short on money. Give your budget some wiggle room.

2. Figure out your down payment

Once you have a target home price, you can start saving for a down payment. Many mortgage lenders require you to make an upfront deposit of up to 20% of your home’s cost.

If your house budget is $200,000, for instance, you might need up to a $40,000 down payment (20% of $200,000). Don’t panic: You may be able to apply for a national or state-backed program that lets you make a smaller down payment. The tradeoff is that you’ll likely have to pay mortgage insurance or a higher loan interest rate3.

3. Calculate your down payment savings goal

Remember those math story problems where you had to help Mary do her shopping? (“If Mary has $10 and she wants to buy pencils that cost $1 for a pack of 5, how many pencils can she buy?”) Well, figuring out how much you need to save for a down payment is a two-part—but easy—math story problem.

  1. Decide when you'll buy your house. Maybe you’re not in a hurry, aiming to buy a house in about 5 years. Or maybe you’d like to get into your own house within the next 1 to 3 years. The less time before you buy, the quicker you’ll need to save your down payment money.
  2. Divide your estimated down payment by the number of months before you start home shopping. If you need to save for a $40,000 down payment to buy a house in 5 years (60 months), that’s $40,000 divided by 60 = $667. You’d need to save $667 per month to save your down payment in 5 years.

However, if you’ll need your $40,000 down payment in just 3 years (36 months), your calculation is $40,000 divided by 36 = $1,111 in monthly required savings.

Down payment amount When you'll need it Do the math How much you need to save each month
$40,000 In 5 years (60 months) $40,000 ÷ 60 = $667
$40,000 In 3 years (36 months) $40,000 ÷ 36 = $1,111


4. Find ways to save even faster

Saving for your home down payment is a big financial project. Here are some simple ways to save for a house even while you’re renting:

  • Sign up for automatic savings: Ask your employer or bank to automatically transfer some money each month from your checking to your savings account. Earmark the money for your house down payment.
  • Slash unnecessary expenses: Are you sure you need 4 different TV viewing subscriptions? Could you temporarily live without that coffeehouse latté? Any costs you cut now will free up money for your house savings.
  • Save “surprise” money: If you get a work bonus, tax refund or other unexpected money, put it in your house savings fund.
  • Pay less in rent: Consider downsizing to a smaller, less-expensive apartment to save more. Remember: It’s just temporary, until you buy your house.
  • Use credit card bonuses: As long as you’re careful about paying your bills, consider signing up for a credit card that offers generous cash-back bonuses. Add your bonuses to your house savings.

And save for emergencies, too

While you are saving for your down payment, don’t forget to save for “regular life” too. Most experts suggest you try to sock away 3-6 months’ worth4 of essential living costs in a separate account.

This emergency money can come in handy before you buy your home—if your car needs a new carburetor or your dog needs veterinary treatment. After you buy your house, this same emergency fund could help you deal with not-so-fun homeowner events like a roof leak or burst sewer pipe.

5. Decide where to put your house savings

  • Savings accounts that keep your money safe and allow you to withdraw your money whenever you need it are typically the best ways to save for a house. High-yield savings accounts offer better rates than basic savings accounts. Online savings accounts make it simple to track your savings goal and transfer money between accounts. Also, your money is FDIC-insured and ready to withdraw when you find your dream home.
  • Money-market accounts usually pay better-than-average interest rates, too. A big advantage is that you can write checks for your down payment and home closing costs directly from money market accounts.
  • Certificates of deposit (CDs) offer generous interest rates in exchange for you agreeing to “lock up” your money for a set period (for instance, 3 months, 6 months or longer). Consider putting your money into CDs that “mature” (release your money) around the time you’re planning to start house shopping.

Whenever you’re planning to start shopping for your dream home—in a few months or a few years—creating a down payment savings plan that works for you can be a helpful tool. For one thing, having a solid savings plan can help reduce some of your home buying stress.

Even more important, though, ending up with a healthy down payment can smooth the home buying process. Before you know it, you’ll be Instagramming pics of that “sold” sign on your dream house.

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