In recent years, owning a home has grown more costly, excluding numerous younger purchasers from the real estate market.
The rise in inflation has escalated the overall cost of living, driving up house prices and making it challenging for potential buyers to accumulate funds for a down payment as they juggle rental expenses and various other monetary responsibilities.
However, most first-time homebuyers may not need to save as much as they think for a down payment.
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The general guideline is to set aside 20% for a down payment. Those seasoned homeowners who have previously navigated this process have built up equity, which makes providing a 20% down payment considerably easier.
However, most first-time homebuyers may only be able to put down between 5% and 10%.
Financial expert Dave Ramsey highlights the best ways first-time homebuyers can save for a home and warns of the hidden costs behind lower down payments.
Dave Ramsey discusses how the rising cost of living is affecting homebuyers’ down payments.
Several decades ago, a down payment of 20% of the home’s value was fairly standard across most age groups. However, as home prices have surged with the cost of living, many first-time buyers find that 5-10% is much more feasible.
Credit card obligations, educational borrowings, and the expenses associated with daily life are among the biggest contributing elements.
stopping purchasers from setting aside funds for a downpayment
Although it generally advisable for potential homebuyers to settle high-interest debts prior to purchasing a house, the majority of Americans carry some form of existing liabilities.
Ramsey states that establishing a savings plan is the best approach to reach significant monetary objectives such as purchasing a home. He notes, “Saving up for a house isn’t easy—it’s more akin to climbing a mountain than taking a leisurely stroll through one. However, once you define your objective clearly, you’ll feel hope blooming within you.”
he wrote
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Buying a house within your financial limits ensures that your monthly expenses related to owning the property do not surpass one-fourth of your total monthly earnings, factoring in taxes, insurance, and potential homeowners association dues.
Ramsey advises people who are saving for a down payment to resist the urge to put less than 5% down. He stated, “Putting less than 5-10% down is essentially a flimsy down payment and will almost certainly lead to being underwater on your house. Additionally, you’ll end up spending a substantial amount on interest and fees throughout the duration of your loan.”
Reduced initial payments cost home purchasers more over time.
By April 2025, the
The typical initial payment for a house in the U.S. stands at around 15%.
, or $54,310, according to a Bankrate analysis. Typically, though, first-time homebuyers tend to put down less than average because they lack the equity accumulated from prior properties to bolster their down payment.
Although it’s typical to make a down payment of under 20%, Ramsey points out that this ultimately leads to significantly higher costs in the long run.
Related: Dave Ramsey cautions homebuyers about a significant error when taking out mortgages
“The general guideline for down payments is as follows: Opting for a smaller down payment will result in higher overall costs for your home, whereas choosing a larger down payment will lead to lower expenses,” he went on to say.
Why is this accurate? This is because the amount of your down payment influences three aspects: whether you require PMI, your monthly mortgage payment, and the overall cost of interest.
If purchasers make a down payment of less than 20%, lenders mandate Private Mortgage Insurance (PMI) to safeguard their investments until 20% of the house cost has been settled. This insurance, along with extra interest charges, leads buyers to pay an additional tens of thousands over time.
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