When it comes to determining how much home you can afford, your monthly mortgage payment is only one part of the equation.
Setting a realistic budget is an important step to being financially prepared for homeownership. There are one-time expenses when you buy a home, like your down payment and closing costs. You’ll also need to be ready to cover ongoing costs, including homeowners' insurance, property taxes and routine home maintenance.
This article will help you understand the costs of buying, owning and maintaining your home, and how you can budget accordingly.
How much can I afford to spend on a home?
To get a very rough estimate of an affordable price range, you could multiply your annual gross income (what you earn before tax) by 2.5. But when it comes to getting a mortgage and purchasing a home, there are more things to consider than just your income. Each of these factors plays a role in determining how much you can afford to spend on a home:
- Your credit: Generally, the higher your credit score the more options will be available to you. That could mean a lower interest rate and/or a better loan term.
- Mortgage rates: Small changes in rates can have a big impact. Lower rates make homes more affordable, which increases your purchasing power.
- Home-related costs: Your down payment is probably top of mind, but you’ll also need to cover closing costs, moving expenses and other incidentals.
The Freddie Mac mortgage calculator estimates how much you can afford to spend on a home, breaking it down in terms of monthly mortgage payments. Find out how much you can afford.
How do I start saving for a house?
Use the Freddie Mac budget worksheet to see where you’re spending money and to calculate your total monthly expenses.
How much should I budget for buying a home?
Most lenders agree that you should spend no more than 28% of your gross monthly income on a mortgage payment (including principal, interest, taxes and insurance) and no more than 36% on total debt (mortgage, student loans, credit cards, etc.). This is also known as the 28/36 rule of budgeting.
How much should I save for a down payment?
Depending on your mortgage type and credit history, your down payment will range from 3 to 20% of the purchase price of the home.
Note: If your down payment is less than 20% and you have a conventional loan, your lender will require private mortgage insurance (PMI) each month until you build up 20% equity in your home. To avoid PMI, you may want to save up for a larger down payment. Speak with your lender about your options and what is right for your situation.
Need help saving for a down payment? Learn about down payment assistance programs.
How much should I save for closing costs?
Your down payment is only part of the upfront costs you’ll need to consider when determining your homebuying budget. Upfront costs typically range from 2 to 5% of your purchase price and include your appraisal fee, credit report fee, tax services fee, government recording charges, lender's origination fee and more. For instance, if the purchase price of a home is $200,000, you can expect to spend between $4,000 and $10,000 on closing costs.
For a closer look at the kind of expenses you should plan for before closing, read Budgeting for Upfront Costs: A Homebuyer’s Guide.
How much do I need to put into escrow?
An escrow account essentially acts as a savings account for a homeowner. The funds in the escrow account are used to cover annual costs like property taxes and insurance premiums. Many lenders require that you establish an escrow account and pay two months of these reserves at closing.
Note: Once you have purchased your home, a portion of each monthly mortgage payment goes into your escrow account to cover your annual costs for taxes, PMI, homeowner’s insurance premiums, etc. when they are due.
New and ongoing expenses to include in your budget
Buying a home comes with additional expenses that are easy to overlook. Be sure to talk with your lender about all anticipated costs throughout your homebuying process.
Depending on your situation, you may want to prepare for initial expenses, including:
Once you’re in the home, you’ll be responsible for making monthly mortgage payments which may include:
- Your mortgage principal
- Property taxes
- Homeowner’s insurance
- Private mortgage insurance (PMI)
- Homeowners' association (HOA) fees
Use your home inspection results to take inventory of repairs that may be needed and the age of big-ticket items, such as your roof, decks, HVAC system, etc. If you believe that any of these will need replacing in a few years, make this part of your savings plan now. Include regular maintenance expenses, too, such as:
- Lawn care
- Gutter cleaning
- Appliance upkeep
For more information about preparing for and buying a home, visit My Home by Freddie Mac®.