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If you’ve been thinking of buying a house, you probably know that you should start saving up toward a down payment. However, if you’ve ever asked yourself how much you should be saving, you’re not alone. I’ve broken down the math for you below. Use these equations – and calculators – provided to figure out your savings goal.
Find out how much you can afford to pay in housing costs each month
Conventional wisdom states that housing expenses should never exceed 28% of your total monthly income. Using that figure, if you make $5,000 per month, that would translate to a monthly housing payment – which should include additional costs like taxes, mortgage insurance, and HOA fees – of $1,400 per month.
To find your amount, the math would look like this:
Your monthly take home pay x 0.28 = Your ideal monthly housing payment
Learn how much house you can afford
Once you have your ideal monthly housing payment in hand, you can use that to find out how much house you can afford. To do this, you’ll also need some additional information. You’ll also need a projected annual interest rate and the number of monthly payments you’ll make over the life of the loan.
The formula for this is as follows:
Loan amount = (Monthly payment/(Annual interest rate/12) ) x (1 – (1/(annual interest rate/12)*number of monthly loan payments)
The math here can get pretty complicated so I suggest using this calculator to do the legwork instead.
Continuing with the example above, that $1,4000 monthly payment over a 30-year loan with an interest rate of 5% would average out to a loan amount of $260,794.26. For the purposes of this article, I’ll round it to $260,000.
Zero in on your down payment amount
These days, you need to be prepared to make a down payment of at least 3.5% – 5%. However, if you aim higher and save up a down payment between 10% and 20%, you’ll have access to better interest rates, which could save you money over the life of the loan.
No matter how much you decide to save, the math will look like the following:
Your total loan amount x down payment percentage = down payment amount
In the example above, if I used my $260,000 loan amount and wanted to make a 20% down payment, it would look like:
$260,000 x 0.20 = $52,000
The answer you get is equal to the amount that you should aim to save up to put towards a down payment.