How to Save for a Down Payment

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Saving for down payment helps pave the way to homeownership, but it’s certainly no small feat, especially considering the meteoric rise in home prices over the last few years and the continued impact of inflation on household budgets.

The larger your down payment, the less you need to borrow from a mortgage lender, meaning your monthly mortgage payments will be lower. You may also qualify for a lower interest rate on your loan. Plus, the more you’re able to put down in cash, the more attractive your offer will likely be to sellers.

Saving up for a down payment can be a long process and often requires sacrifices like working more or spending less. From calculating how much you need to save to the best tips for stashing money away, here’s a guide on how to save for a down payment on a house.

Table of Contents

• Figure out how much you need to save for a down payment
• 4 ways to help you save for a house
• Use the right account to help your savings grow
• Ways to get help saving for a down payment
• How to save for a down payment on a house FAQs

Figure out how much you need to save for a down payment

One of the first steps toward buying a home is figuring out how much of a down payment you need to save. This will give you a savings goal as well as a sense of how long it will take.

First-time buyers often have to start from scratch when saving for a down payment, while homeowners usually are able to use money from the sale of their last home.

An old rule of thumb for down payments is to save about 20% of the price of the home you want to buy, but it’s possible to buy a house with much less down.

That said, conventional loans, which are the most common type of home loan, require private mortgage insurance (PMI) if your down payment is less than 20%. That insurance can add at least $100 a month to your monthly bills.

Even with the additional cost of insurance, many home buyers opt to put much less money down. That’s not necessarily a bad thing, as long as you understand the tradeoffs and you’re sure you can afford the higher monthly payments that come with a lower down payment.

Down payments can be as low as 5% for most buyers and even less if you’re a first-time buyer or you qualify for Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans or Department of Agriculture (USDA) loans.

As you’re saving for a down payment, you should also keep in mind that you need to have cash available when you finalize a purchase for closing costs. These typically total 2% to 5% of the home loan amount.

According to real estate brokerage Redfin, the typical American down payment was 16.1% of the purchase price in September, or $60,980. Those figures are both higher than they were a year ago. Experts say that's because buyers are making sizeable down payments amid high mortgage rates to avoid high monthly payments.

While it’s easiest to set a down payment savings goal after you know how much the homes in your area cost, you can (and should) still get started saving if you’re several years away from starting the home buying process. To help you get an idea of how much you should aim to save, look up the median home prices in areas you think you may end up buying.

4 ways to help you save for a house

There’s no “easy hack” to save up the money needed to buy a home. Coming up with a good down payment is often the biggest barrier to homeownership for potential first-time buyers. But these tips for growing your down payment fund can help you overcome the challenges of the process.

Make a budget to help reduce expenses

Everyone saving money for a home should make a budget and start trying to reduce unnecessary expenses.

This may involve dining out less frequently, shopping less or limiting leisure travel. You can also get a roommate or try to move to a new apartment to limit how much you pay in rent. (This can make a big difference since rent is typically a significant portion of your monthly expenses.)

Revisit your subscriptions and eliminate those you rarely use, borrow books from the library, don’t buy the shoes you saw on Instagram — you know what to do, you just have to do it.

While it’s not fun to put yourself on a tight budget, pulling back can be a little easier when you know you’re making progress toward your homeownership goal.

Pay down high-interest debt

It may sound counterintuitive to spend money when your goal is to save it. But carrying debt month-to-month ultimately limits how much you can save, especially if you’re racking up major interest on an expensive loan or credit card.

If you have credit card debt, that’s the first thing you need to tackle. The average credit card interest rate now tops 21%. At that rate, if you’re carrying a balance of $8,000 a month, for example, you’re accruing more than $140 in interest each month. Next, try to pay down personal loans, which carry an average interest rate of about 12%, according to the Federal Reserve, and private student loans, which tend to have higher rates than federal student debt.

For debts with a low interest rate, there’s less immediacy to attacking them and you can continue making your regular monthly payments while you save money for the house.

Once you’ve paid off your debts, you’ll be able to put the money you were spending on debt (and interest) toward your down payment. Your credit score will also improve as you pay off debt, making it easier to qualify for a good mortgage rate.

Get a side hustle

If you can’t boost your savings by cutting back your expenses, then your other option is to increase how much you’re bringing in each month. One option is picking up a side hustle and putting all of that extra cash into your home fund. It could be a traditional part-time job, like picking up shifts in a restaurant or working in retail. Or there are also more flexible options, like taking on hourly labor gigs, driving for an app like Uber, opening an online store, giving lessons or something more creative. Think about what skills you have that could be valuable toward reaching your down payment goal.

Automate your savings

If you have a regular income stream, experts recommend setting up automatic deposits to your savings. This is one of the easiest ways to make sure you’re hitting your savings goals: You can have a portion of every paycheck transferred into savings before you even have a chance to spend it. In addition to your automated savings, consider transferring extra income like bonuses directly to your down payment fund.

Use the right account to help your savings grow

The best types of accounts for a home down payment fund earn interest but aren’t too risky.

Popular FDIC-secured options include high-yield savings accounts and money market accounts. Because most people building up toward a down payment have a relatively short timeline before they plan to use the money, most experts recommend avoiding putting most of your savings in the stock market. If you do invest it, be sure to keep most of your money in lower-risk investments, like bonds or money market funds.

Here’s more info on some of the most popular accounts to stash a down payment.

High-yield savings accounts

These savings accounts offer better rates (officially: annual percentage yields or APYs) than standard savings accounts. In fact, they can pay more than 10 times as much as standard accounts at brick-and-mortar banks. As of December, for example, the national average savings account interest rate was about 0.5%, while the best high-yield savings accounts were paying out more than 4%. While interest rates fluctuate, you can never lose money in these accounts. The only potential downside is that you may be able to get better returns with a higher-risk savings option.

CDs

Like high-yield savings accounts, certificates of deposit (CDs) have higher interest rates than a standard savings account. The rates on CDs also tend to be higher than high-yield savings account APYs, but the compromise is that you’re not supposed to access the funds for a set amount of time that can range from three months to 10 years. If you do need to take out money before the allotted time, you’ll pay an early withdrawal fee.

Individual Retirement Accounts (IRAs)

While retirement accounts typically carry early withdrawal penalties if you’re under 59 ½, both traditional IRAs and Roth IRAs have special exemptions for home purchases. The rules vary by account type, but in general, you can withdraw up to $10,000 without penalty for a down payment on a house at any age if it’s your first home purchase. Note that with traditional IRAs, you contribute money before paying taxes on it, so if you withdraw it for a home, you will have to pay income tax on that amount. Roth IRA contributions are after taxes, though, which means you can use your contributions and earnings for a home without paying any taxes or penalties, as long as the account has been open for at least five years.

Money market accounts

A money market account is a type of bank account similar to a high-yield saving account, but with potentially less withdrawal flexibility. The savings rate is usually higher than those offered in standard savings accounts, but you’ll have to compare your options to see if a CD or a high-yield savings account is more attractive. Note that these are different from the similarly named money market funds, which are short-term investments that are not FDIC-insured and could lose money.

Ways to get help saving for a down payment

There are thousands of down payment assistance programs in the U.S. to support potential homebuyers. Generally, they’re designed to support specific groups, like first-time homebuyers or veterans. These home-buying programs are often administered by state or local government entities. The Department of Housing and Urban Development (HUD) maintains a database that can help you find resources.