Saving for a Home Down Payment

Saving for a home down payment is one of the most significant financial goals for families. The amount you need depends on the home price, loan type, and whether you want to avoid private mortgage insurance. This guide walks through how to set your target, choose where to save, and build a realistic timeline to reach your goal.

Down Payment Requirements

Conventional Loans

Conventional mortgages typically require 5% to 20% down. The key threshold is 20%, because putting down less triggers private mortgage insurance (PMI).

PMI typically costs 0.5% to 1% of the loan amount annually. On a $400,000 home with 10% down ($40,000), you'd borrow $360,000. PMI at 0.75% would add $2,700 per year, or $225 monthly, until you reach 20% equity.

FHA Loans

FHA loans allow down payments as low as 3.5% for borrowers with credit scores of 580 or higher. However, FHA loans require mortgage insurance premiums (MIP) for the life of the loan if you put down less than 10%.

On a $400,000 home with 3.5% down ($14,000), you'd borrow $386,000. The upfront MIP is 1.75% ($6,755), and annual MIP is 0.55% ($2,123 per year, or $177 monthly).

VA and USDA Loans

VA loans (for veterans and active military) and USDA loans (for rural areas) may require no down payment. These programs have specific eligibility requirements but can significantly reduce upfront costs.

Don't Forget Closing Costs

Closing costs typically run 2% to 5% of the purchase price. On a $400,000 home, expect $8,000 to $20,000 in closing costs covering:

• Loan origination fees (0.5% to 1%)
• Appraisal ($300 to $600)
• Title insurance ($1,000 to $3,000)
• Escrow fees
• Recording fees
• Prepaid property taxes and insurance

You can sometimes negotiate for the seller to pay a portion of closing costs, but this shouldn't be your primary plan.

Setting Your Savings Target

Your total cash needed equals down payment plus closing costs plus a reserve fund.

Sample Targets by Home Price

For a $400,000 home with 20% down, plan to have at least $100,000 saved: $80,000 down payment, $12,000 closing costs, and $8,000 in reserves.

Timeline and Monthly Savings Targets

The typical saving period for a down payment is 3 to 5 years. Here's what monthly savings look like for different targets and timelines:

$80,000 Target (20% on $400,000 home)

$40,000 Target (10% on $400,000 home)

Where to Save Your Down Payment

Your savings vehicle should match your timeline and risk tolerance. For money you'll need within 5 years, preservation of principal is more important than growth.

High-Yield Savings Accounts (HYSA)

Best for: Any timeline

Current rates: 4% to 5% APY

Advantages:

• FDIC insured up to $250,000
• Fully liquid with no penalties
• Interest compounds automatically

A 4.5% HYSA turns $1,500 monthly contributions into $79,847 after 4 years (versus $72,000 with no interest).

Certificates of Deposit (CDs)

Best for: Portions of your savings with defined timelines

Current rates: 4% to 5% for 1-year CDs

Advantages:

• FDIC insured
• Locked-in rate protects against falling rates
• Slightly higher rates than HYSA

Disadvantages:

• Early withdrawal penalties (typically 3-6 months interest)
• Less flexibility if your timeline changes

Consider a CD ladder: Split your savings across CDs maturing at different intervals (6 months, 12 months, 18 months) to maintain some liquidity while capturing higher rates.

I-Bonds

Best for: Savings you won't need for at least 1 year

Current rates: Variable, based on inflation (composite rate changes every 6 months)

Advantages:

• Backed by U.S. government
• Inflation protection
• Tax-deferred interest

Disadvantages:

• $10,000 annual purchase limit per person
• Cannot redeem for 12 months
• Forfeit 3 months interest if redeemed before 5 years

I-Bonds work well for the portion of your down payment you're certain not to need within the first year.

Where Not to Save

Avoid these for down payment savings:

• Individual stocks: Too volatile for short-term goals
• Cryptocurrency: Extreme volatility could wipe out years of savings
• Aggressive mutual funds: A 20% market drop could delay your home purchase significantly

A 3-5 year timeline is too short to recover from a major market decline.

Worked Example: Saving $80,000 Over 4 Years

The Martinez family wants to buy a $400,000 home in 4 years. They need $80,000 for a 20% down payment plus $12,000 for closing costs, totaling $92,000.

Current Situation

• Combined income: $120,000
• Current savings: $8,000
• Available for monthly savings: $1,750

Savings Strategy

Year 1: High-Yield Savings Account

• Monthly contribution: $1,750
• Starting balance: $8,000
• End of year balance at 4.5% APY: $30,182

Year 2: Continue HYSA + Add I-Bonds

• HYSA contributions: $1,250/month
• I-Bond purchases: $500/month ($6,000 total for year)
• End of year balance: $48,891 (HYSA) + $6,135 (I-Bonds) = $55,026

Year 3: Continue HYSA + I-Bonds + CD Ladder

• HYSA contributions: $1,000/month
• I-Bond purchases: $500/month
• 12-month CD: $5,000
• End of year total: ~$78,500

Year 4: Consolidate for Purchase

• HYSA contributions: $1,000/month
• Let I-Bonds mature past 12-month minimum
• CD matures and rolls to HYSA
• Final total: ~$95,200

Result

The Martinez family exceeds their $92,000 target, providing a cushion for unexpected costs or a slightly more expensive home.

Strategies to Accelerate Savings

Reduce Housing Costs Temporarily

If you're currently paying $2,000/month rent but could move somewhere for $1,500/month, the $500 monthly savings becomes $6,000 additional down payment funds per year.

Direct Windfalls to Savings

Commit to saving:

• Tax refunds (average: $3,000)
• Work bonuses
• Cash gifts
• Side income

A $3,000 annual tax refund over 4 years adds $12,000 to your down payment.

Automate Transfers

Set up automatic transfers on payday before you can spend the money. Treating savings as a fixed expense increases success rates significantly.

First-Time Buyer Programs

Many states and localities offer down payment assistance for first-time buyers (generally defined as not owning a home in the past 3 years).

Common programs include:

• Grants that don't require repayment
• Forgivable loans (forgiven after 5-10 years of residence)
• Low-interest second mortgages for down payment
• Tax credits for mortgage interest

Check your state housing finance agency and local municipality for available programs. Income limits typically apply.

Timeline Planning

36-48 months before purchase:

• Set target home price and down payment percentage
• Calculate total savings needed
• Open dedicated HYSA
• Establish automatic monthly transfers

24-36 months before purchase:

• Review progress and adjust contributions if needed
• Consider I-Bonds for portion of savings
• Check credit reports and address any issues

12-24 months before purchase:

• Begin CD ladder for known timeline funds
• Research first-time buyer programs
• Get pre-approved to understand your actual budget

6-12 months before purchase:

• Stop adding to I-Bonds (need 12-month minimum hold)
• Consolidate funds to HYSA for liquidity
• Avoid major purchases that affect credit score

Decision Checklist

Before beginning your down payment savings journey, confirm you've addressed each item:

• Calculated target home price based on income and local market
• Decided on down payment percentage (3.5%, 10%, 20%)
• Added closing costs (3-5%) to savings target
• Established emergency fund separate from down payment savings
• Opened dedicated high-yield savings account
• Set up automatic monthly transfers
• Researched first-time buyer programs in your area
• Checked credit reports and addressed any errors
• Created timeline with monthly savings milestones
• Identified additional income sources (bonuses, tax refunds) to accelerate savings
• Confirmed both partners agree on timeline and target (if applicable)