Start with a target number and a timeline
Before you open a savings account, figure out two things: how much you need to save and when you need it by. The down payment itself is usually 3 to 20 percent of the home's price, depending on the loan type you choose — but you will also need money for closing costs, inspections, and appraisals. These add another 2 to 5 percent on top.
If you are looking at a $250,000 home with a 5 percent down payment, you need $12,500 for the down payment alone. Add closing costs of $5,000 to $12,500, and your real target is closer to $18,000 to $25,000. Once you know the number, work backward: if you want to buy in three years, you know how much to set aside each month.
Be honest about your timeline. Saving $500 a month for three years gets you $18,000. Saving $500 a month for five years gets you $30,000. The longer your timeline, the less painful each monthly deposit feels.
Key Takeaways
- Your real savings target includes the down payment plus closing costs, appraisals, and inspections — often 5 to 25 percent of the home price, not just 3 to 20 percent.
- A high-yield savings account earns more interest than a regular savings account and keeps your down payment money separate and accessible when you need it.
- Automating your savings — setting up a transfer from checking to savings on payday — removes the decision of whether to save each month.
- Down payment information programs exist in many states and counties, and some allow you to combine them with your own savings.
Choose a savings account that earns interest
A regular savings account at a big bank typically earns almost no interest — sometimes 0.01 percent per year. A high-yield savings account at an online bank or credit union earns 4 to 5 percent per year right now, though that rate changes. The difference is real: on $20,000 saved over three years, a high-yield account earns you $2,000 to $3,000 in interest. A regular account earns you $6.
Open the account at a bank or credit union separate from where you do your everyday banking. This creates a mental barrier — you are less likely to dip into it for groceries or a car repair. Many online banks have no minimum balance and no monthly fees, so there is no cost to opening one.
Do not put down payment money into the stock market or cryptocurrency. You need this money on a specific date, and markets can drop right before you need to buy. Keep it in a savings account where it is safe and available.
Automate your savings so you do not have to think about it
The easiest way to save is to never see the money in the first place. Ask your employer's payroll department to split your direct deposit: send 80 percent to your checking account and 20 percent to your down payment savings account. If your paycheck is $2,000, $400 goes straight to savings before you can spend it.
If your employer does not offer split deposit, set up an automatic transfer from checking to savings on the day you get paid. Most banks let you do this online in five minutes. The transfer happens the same day every month, and you adjust your spending budget to account for it.
Start small if you need to. Saving $100 a month is better than saving nothing because you are waiting for the perfect amount. You can increase it later when you get a raise or pay off a debt.
Cut expenses by finding what you actually spend money on
Most people who think they cannot save are actually spending money without noticing. For one month, write down or screenshot every purchase — coffee, subscriptions, groceries, gas, everything. At the end of the month, add it up by category. You will usually find $200 to $400 a month you did not know was leaving.
Common places to find money: subscriptions you forgot you had (streaming services, apps, gym memberships), eating out more than you realized, and small daily purchases that add up. You do not have to cut everything — just the things you do not actually value. If you love coffee, keep the coffee. Cut the subscription you have not used in six months.
Once you find the money, move it to savings instead of spending it. This is easier than trying to save "whatever is left over" at the end of the month, because there usually is nothing left over.
Understand down payment information programs in your area
Many states, counties, and cities offer programs that give or lend money for down payments. Some programs are grants — money you do not have to pay back. Others are forgivable loans — you borrow the money, but the loan disappears if you stay in the home for a set number of years. A few are second mortgages, which means you borrow the money and pay it back over time.
These programs usually have income limits and are designed for first-time buyers. Some require you to take a homebuying class. Many let you combine their money with your own savings, so a $10,000 grant plus your $15,000 in savings gets you to $25,000.
To find programs in your area, contact your city or county housing authority, or call 211 and ask for down payment information. You can also search online for "[your state] down payment information" or "[your county] first-time homebuyer programs." Start looking at least six months before you plan to buy, because some programs have waiting lists.
Plan for the other costs that come with buying
The down payment is not the only money you need on closing day. Closing costs — the fees paid to the lender, title company, inspector, and appraiser — usually run $5,000 to $12,500 on a $250,000 home. Some lenders let you roll closing costs into the loan, but that means you pay interest on them for 30 years.
You will also need money for a home inspection (usually $300 to $500) and an appraisal (usually $400 to $600). Some lenders require these before they will approve your loan. If you are buying a home that needs repairs, you may want a reserve fund of $2,000 to $5,000 for urgent fixes in the first year.
Add all of these to your down payment target before you start saving. It is better to oversave and have money left over than to reach your down payment goal and discover you cannot afford closing day.
Keep your down payment money separate from emergency savings
You need two different savings accounts: one for your down payment and one for emergencies. Your emergency fund should cover three to six months of rent or mortgage, utilities, food, and insurance. Your down payment fund is for buying a home, not for car repairs or medical bills.
If you raid your down payment savings for an emergency, you are back to square one. Build your emergency fund first — even if it is just $1,000 to start — so you have a cushion. Then start saving for the down payment on top of that.
Once you own a home, you will still need an emergency fund, because homeowners face unexpected costs like roof repairs or furnace replacement. Saving for both at the same time is hard, so start with emergency money, then shift focus to the down payment.
Frequently Asked Questions
How much should I save before I start looking at homes?
Have your full down payment plus closing costs saved before you make an offer. Lenders want to see that the down payment comes from your own money, not from a loan. If you have 80 percent of your target saved and a down payment information program will cover the rest, you can start looking — but do not make an offer until both pieces are in place.
Can I borrow money from family for a down payment?
Yes, but lenders require proof that it is a gift, not a loan you have to pay back. Your family member will need to sign a gift letter stating the money is a gift with no repayment expected. Some lenders also want to see that the money has been in your account for at least two months before closing, to prove it is not borrowed from somewhere else.
What if I cannot save enough for a 20 percent down payment?
You do not need 20 percent. Many loans accept 3 to 5 percent down. With less than 20 percent down, you will pay mortgage insurance — an extra monthly fee that protects the lender if you stop paying. This costs 0.5 to 1 percent of your loan amount per year, but it lets you buy sooner instead of waiting five more years to save.
Should I use a credit card to pay for down payment savings?
No. Lenders check your credit report before closing, and they want to see that you have not taken on new debt. Opening credit cards or taking out loans in the months before you buy can lower your credit score or make the lender nervous about your finances. Save in cash or a savings account instead.
What happens to my down payment if the home inspection finds problems?
You do not lose your down payment. If the inspection reveals major problems, you can renegotiate the price, ask the seller to fix things, or walk away from the deal. Your down payment is held in escrow — a neutral account — until closing. If the deal falls through, the money comes back to you, though you may lose the inspection and appraisal fees you already paid.