Whether you're just browsing or ready to make a move, buying a home comes with a lot of questions.
To help you get to the essentials, we've created three tailored guides.
What stage are you in?
> 5 years out
< 5 years out
Or dive straight into the full guide below
With data from
What are the all-in costs of home ownership?
Conventional wisdom may lead you to believe that the only costs of home ownership are the down payment and
the monthly mortgage payment. However, if you budget with only these two factors in mind, you'll likely be
caught off guard when the bills come rolling in.
Some additional costs to keep in mind:
This is not meant to discourage you from exploring homeownership, but rather to provide a comprehensive view
into the costs you can expect when you become a homeowner.
See the benefits of home ownership
What does it take to qualify for a mortgage?
When it comes to securing a mortgage, there are several financial factors at play.
Here are a few things you can do to ensure you qualify for a mortgage with favorable terms:
Keep your credit score up
Mortgage lenders consider your credit score when determining how risky it is to give you a loan, which
impacts the interest rate you can get. If your credit score is above 750, you are likely to get a mortgage
interest rate that is 0.20% lower than someone with a credit score of 660 to 680. If your credit score is
below 600, you should expect some challenges in qualifying for a mortgage and, if you do find one, it may
have a much higher interest rate.
Keep your Debt-To-Income (DTI) ratio low
Your DTI is the sum of all of your monthly debt payments, including credit lines, credit card debt,
auto loans, and your upcoming mortgage expenses, as a percentage of your monthly pre-tax income.
Most mortgage lenders prefer to issue a mortgage that will keep your DTI below 33%. Once your DTI
goes above 44%, it becomes much more difficult to secure a mortgage.
Make a healthy down payment
The size of your down payment, or the upfront payment you make on the house, impacts the size of your monthly
mortgage payments. The standard rule of thumb for a down payment is 20%, however, the median down payment in
the US is 15%. Mortgage lenders will often offer lower interest rates when a down payment of greater than 20%
While these three inputs are common for most banks, mortgage approval standards vary regionally. In fact,
our analysis shows that the median DTI ratio across states ranges from 32% in Kansas to 40% in Hawaii.
Your home budget is limited by the size of your mortgage, but other factors are at play as well when it comes
See more details
How big should my down payment be?
Before diving into the details, let's first define a few key terms:
Down payment refers to the upfront payment you make on the house.
Principal payments reduce the amount you owe on your mortgage.
Interest payments are what the bank charges for lending you the money.
The size of your down payment directly affects the overall costs of your home. The standard size of a
down payment is 20% of what you pay for a home. If you put more down, you will have smaller monthly principal
and interest payments.
If your down payment is lower than the standard 20%, not only will you have higher monthly principal and
interest payments, but many mortgage lenders may require additional mortgage insurance, which can be up to
1% of your total mortgage value. Not to mention, if you put less than 10% down, you may have trouble
qualifying for a mortgage at all.
Larger down payment means lower monthly payments
The example assumes a home that costs $800,000 with a 30-year fixed rate mortgage.
Monthly principal and interest payment
Monthly mortgage insurance
Total monthly costs
Note: Assumes 4.05%, 4%, and 3.94% interest rate respectively for 10%, 20%, and 30% down payment scenarios.
Source: FinanceCreation Research
When is the best time to buy?
Timing the real estate market is just like trying to time the stock market –
Home prices will go up and home prices will go down. Plus supply-and-demand varies regionally, making any
attempt to time the market even more challenging.
As evident from the Case-Shiller Home Price Indices, the leading measures of U.S residential real estate
prices, while home prices in the US have increased over time, real estate market volatility is hard to avoid.
The real estate market is impossible to time
Note: Data normalized to 100 in 1987
Source: S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index retrieved from
Federal Reserve Bank of St. Louis
Keep in mind there's actually an implicit cost to waiting. Even if you don't pull the trigger on buying a home,
that doesn't mean you're not incurring housing expenses. For instance, waiting a year to buy a home means
paying a year of rent to your landlord instead of towards a mortgage.
Find out how to compare renting versus owning.
Unfortunately, if the real estate market declines, so will the value of your home. On the other hand, if the
real estate market is on the rise, homeowners will benefit from the appreciation of their home value. Just like
the financial markets in general, the only sure thing in the real estate market is that it will go up and it
will go down.
The market is unpredictable
The impact of volatility in the real estate market is unavoidable, even if you're not a homeowner. If you rent
and the real estate market is on the rise, you can surely expect your rent to increase. But rent prices do not
always increase one-to-one with home prices. According to Redfin data, between Jan 2010 and Dec 2017, average
home prices have increased by around 53%, but average rents have increased by around 26%.
In the event of a downturn, if you have a fixed-rate mortgage your monthly mortgage payments should not be
affected by any market volatility. However, you are at risk if there's a significant drop in real estate prices
and you have a sudden need to sell your home, say for a job opportunity in a new location.
In this case, you may be forced to sell your home at a loss. If the value of your home has decreased
significantly, you may not have enough to repay the remaining balance on the mortgage.
Don't be discouraged by uncertainty
It's wise to understand what can potentially go wrong. But in the face of certain uncertainty, our advice
is the same advice we give investors: The risk of a downturn is a part of life. Having a long-term time horizon
and staying the course is your best path forward.
Consider the benefits of owning a home.
How does location factor in?
Deciding where to buy is often almost as big of a decision as which home to buy. For those living in
urban areas like New York or San Francisco, a fairly common question that arises is whether or not to make
the move to the suburbs.
A huge draw of the suburbs is you can often get a larger home for the same budget. But, on the other hand,
there are many perks and conveniences of city life that can't be easily replaced when you move away.
Aside from size of home you can get for your money, there are a number of other factors to consider and
trade-offs to think through when deciding on the location to buy that's right for you:
Property taxes can vary dramatically by city or county. For example, Manhattan's property tax rate is 0.51%.
While in Fort Lee, NJ, just 10 miles across the bridge, property taxes are are about 1.94% of home prices.
However, the price of homes in Fort Lee is much lower, so it's important to to assess your all-in costs.
The location you choose could even affect the mortgage and its interest rate. When issuing mortgages,
lenders often factor in the difficulty or ease of selling a home given its location, in case of foreclosure.
If you are planning on starting a family or have kids now, school districts are another major factor in
deciding where to live. Great public school districts often increase home prices in a specific area, which
means you may have to pay a premium for access to better education.
If your job is in the city, moving to the suburbs will mean increased time and money spent traveling every day.
The cost for groceries, utilities, and other services can also vary widely between urban and suburban areas.
What are the benefits to owning a home?
Even if you don't buy a home, you still need to pay something for lodging. For most people, this is in the
form of monthly rent. When you buy a home and pay a mortgage, you're actually saving into a permanent asset.
Plus, you get the automatic protection against rising rent costs.
See how to value a home as an asset
There are a few concrete financial benefits to owning a home, namely a potentially significant tax break.
Renters don't get a tax deduction from the rent they pay. But as a homeowner, you can deduct up to $10,000
paid in property taxes and interest paid on mortgages with balances of up to $750,000 from their federal taxes.
When it comes time to sell your home, you may even exclude the capital gain, up to a certain limit.
The most significant benefits to owning a home are likely not financial. You want to buy a home because you
want a place to call your own, a place that gives you freedom to live the life you want. Your reasons are
often justifiably emotional, which is why the case for buying a home can't simply be rationalized by a
In fact, in a recent National Housing Survey by Fannie Mae, when survey respondents were asked to choose their
top reasons for buying a home, the top four were non-financial.
How should I value my home as an asset?
The costs of homeownership can be a huge portion of your monthly expenses. But over time your house could also
become one of your largest assets. As you start paying down the principal on your mortgage, you also start
building home equity, or the amount of ownership of your home. If you decide to sell your
home in the future, you will likely have cash on hand to spend on something else.
A useful formula to remember:
Home equity = current home value - current mortgage balance
Home equity builds over time
On day 1, you make a $100,000 down payment on a $500,000 home.
In year 5, you've paid down $85,000 in principal, so now you owe just $315,000. And guess what else? The value of your home has appreciated to $564,000.
Source: FinanceCreation Research
A few risks to keep in mind
While a home has value, there are a few considerations to keep in mind that may affect the amount of cash you
can expect from a future sale of the home. First, the real estate market fluctuates and is unpredictable. If
the market goes up, so does the value of your home. Of course, if the market goes down, your home value will
See more on how to think about the real estate market.
In addition, when it comes to selling a home, keep in mind that real estate commissions, home improvement
efforts, transfer tax, and moving costs can add up to over 6% of total sale price.
How do I compare buying versus renting?
When it comes to home ownership, it's tempting to compare your monthly rent with your potential monthly
mortgage. While this is a logical way to evaluate costs on a monthly basis, it actually ignores a number
of significant considerations.
The right monthly costs comparison
To make an accurate comparison between renting and owning, you should understand the full costs of
homeownership. In addition to monthly mortgage payments, there are a number of additional monthly home expenses
to consider, such as property taxes, insurance, and HOA fees. These other expenses can add up to 26% of what
you spend each month on your home
Review the all-in costs of homeownership.
Home requires upfront payment
In addition, in order to be approved for a home purchase, you will need to make a down payment. This amount
is usually at least 20% of the total home cost. In addition, the amount of down payment you make affects
the terms of your mortgage.
See what you should know about the down payment.
Equity in your home
While buying requires more upfront costs, you also own the house outright, albeit with debt from the mortgage.
Over time, the monthly mortgage payments you make will start increasing your home equity. The money you pay on
rent, on the other hand, is money you'll never get back.
See how to value a home as an asset.
What can I do today to be prepared?
If a home purchase isn't in your immediate future, there are a few things you can do to better prepare
far in advance.
Pay down any debt
When you pay down your debt, you decrease your debt-to-income ratio. This is a key input in determining
the terms and interest rate for your mortgage. The rule of thumb is that your total monthly debt
payments should be less than 33% of your monthly pre-tax income.
See more details about mortgage.
Improve your credit score
Lenders use your credit score to assess the risk they take on when giving you a loan. They use it to
determine whether you qualify for a mortgage and what interest rate you'll pay. A healthy credit score is
740 or higher. To increase your score, monitor it via credit reports, set up bill payment reminders and
pay down any debt. Source:
This might seem like a no-brainer, but everyday expenses can get in the way of proactively saving for
larger goals. By defining a monthly amount to put towards a home and depositing it in an appropriate
savings or investment account, your future won't become an afterthought.
Learn more about how to invest home savings.
Time can be your friend. A longer time horizon means more time to save for your down payment and build up your
credit score. However, just because you're buying more time to save for a home purchase doesn't mean you don't
have living expenses. Be sure to factor in rent and other household expenses into your savings plan.
How does a home fit in with my other goals?
The right home is one that still allows you to meet your other financial priorities with confidence.
This means understanding how much home you can afford, and also having a clear sense of your other
goals — both short and long term.
Start on the right foot
Before you start saving for a home, you should put money towards paying down high interest loan. We define
this as loans with interest rates greater than 6%, such as credit card loans or student loans.
Next, you should contribute to your company-sponsored 401(k), but only if your employer offers a matching
contribution. An employer match is basically free money, making it much more attractive to participate.
Map out your priorities
After you pay down debt and put money towards your 401(k), it's time to understand what your financial
priorities are. Do you want to cover your children's college education costs in full? What about having a
comfortable lifestyle in retirement? Do you need to buy a home sooner than later? Once you've decided the
relative importance and timing of these priorities, you can then determine how much of your savings to allot
to each goal.
Understanding the trade-offs
The reality is you only have so much money to work with, so prioritizing one goal will have an impact on the
others. To demonstrate how to consider trade-offs, let's walk through an example. Let's say you're deciding
between buying a larger home that costs $800,000 or a more modest home that costs $500,000
What's your Path forward?
It's important to have a comprehensive plan that accounts for all your financial goals. But arriving at that
plan takes careful research, calculations, and projections. That's why we built Path, our comprehensive
planning solution that does it for you.
Get started with Path.
How should I invest my home savings?
There are several ways to invest in the funds you've set aside for a future home purchase.
The right option for you, depends on your time horizon.
Within five years
Markets can be volatile from year to year. In fact, our analysis shows that there could be a
22% probability of loss
for investments with a time horizon of less than five years. For near term purchases, it's more prudent to stay out of the
markets to avoid a potential downturn.
If your home purchase is in the next five years, we recommend investing funds for a down payment in a
low-risk option, such as a high-yield savings account, certificates of deposit (CDs), or a money market account.
More than 5 years away
If your time horizon is longer, your savings can afford to take on more risk. For home purchases that
are over 5 years away, we recommend investing your money in a long-term diversified investment portfolio,
which can deliver higher returns than short-term savings options.