Figuring out how much money you need to buy a house can be confusing. Instead of needing the exact amount in cash to buy a house, as you do when purchasing most other goods, home buyers usually have to take out a mortgage.

This makes the question of how much money you need more complex since there is not a single amount that you have to budget for. Here’s what you need to know about all the costs of buying a home.

Learn more: Why are house prices so high?

The down payment

The down payment is the money you pay upfront to secure the mortgage loan. You may have heard that you need a 20% down payment to buy a house, but that is not required. Most mortgage programs have minimum down payment requirements, but there are several advantages to saving more for your down payment.

Here’s how larger down payments can help you save money:

• Mortgage lenders often provide lower interest rates to borrowers with large down payments.

• A larger down payment means borrowing less, which means you pay interest on a smaller amount of money.

• Your monthly payment is smaller.

• A larger down payment means you may not have to pay for private mortgage insurance or at least be qualified to cancel it.

Read more: How much down payment do you need for a house?

How large a down payment do I need?

The specific amount you will contribute to your down payment will depend on a number of factors, including:

• Type of mortgage: Different mortgage types have different down payment requirements. While VA loans and USDA loans offer zero-down-payment options, some conventional mortgages require just 3% down, FHA loans require a minimum of 3.5%, and jumbo loans generally require a down payment of at least 10%.

• Your savings and cash reserves: While you want to save as much as you can for a larger down payment, it’s important that you maintain some cash in reserves. New homeowners need to have some set money aside to pay for closing costs, moving expenses, home repairs or renovations, and unanticipated expenses.

• Your monthly payment: The larger your down payment, the smaller your monthly mortgage payment.

Let’s look at an example of what you would pay for each down payment percentage – both upfront and for your monthly mortgage payment. Assume you are purchasing a $350,000 home with a 30-year mortgage with a fixed rate of 7%.

Dig deeper: How to save for a house

The closing costs

Closing costs are the expenses home buyers have to pay as part of processing the sale of the house. There are a number of fees that could be included in your closing costs, such as:

• Origination fee: The fee your lender charges for making the loan.

• Mortgage points: Home buyers can reduce their interest rate by paying for points. One point equals 1% of the mortgage loan, meaning one point on a $100,000 loan costs $1,000.

• Underwriting: The lender had to conduct research, known as underwriting, to determine if you qualify for the mortgage. This fee pays for that research.

• Appraisal and home inspection: This pays for the home appraisal report and the inspection report.

• Title search and insurance: These fees pay for the public records search of the property and insurance protecting you against ownership issues.

• Escrow deposits: Some buyers will need to put money in escrow for property taxes, homeowners insurance, or homeowners' association fees.

• Additional fees: There may be other costs, such as HOA transfer fees or attorney’s fees, that could be part of your closing costs.

Read more: Closing on a house: What to expect and how to prepare

How much should I budget for closing costs?

Not every home closing will have the exact same closing costs, and you can potentially negotiate these costs with the lender and the seller. The home buyer’s closing costs typically equal 3% to 4% of the home’s purchase price, meaning a $350,000 house would have closing costs of around $10,500 to $14,000.

However, you may not have to pay this money out of pocket. Home buyers can request that the closing costs be rolled into the mortgage principal. This will increase the amount of money you are borrowing, which will increase the amount you will pay in interest, the size of your monthly payment and could potentially affect the interest rate your lender is willing to offer.

Learn more: Strategies to get the lowest mortgage rate in 2024

The monthly payment

A monthly mortgage payment will always include a portion that goes toward the principal balance you owe and a portion that pays the interest you owe. As you make payments on this loan over time, the amount of each monthly payment applied to the principal will increase, and the amount applied to interest will decrease.

But mortgage payments may also include other payments besides the principal and interest. Specifically, mortgage insurance may be part of your monthly payment, as well as your property taxes and homeowners insurance.

These additional costs mean your payment amount could change over time, even if you have a fixed-rate loan. For example, if you are required to pay private mortgage insurance, it will be canceled after your principal balance reaches 78% of your home’s original value. Once PMI is canceled, your monthly mortgage payment will decrease.

On the other hand, if your home’s appraised value goes up, that could increase the cost of your homeowners insurance or how much you owe in property taxes – which would make your monthly payment bigger.

Learn more: What percentage of your income should go to a mortgage?

Don’t forget about a cash cushion

When buying a home, you need to budget for multiple and ongoing costs, including the down payment, closing costs, and the monthly mortgage payment. But that’s not the end of the budgeting. It’s also important to keep a financial cushion available to handle unexpected expenses like increased utility costs or emergency repairs.

This is why prospective buyers should focus on how much they can comfortably afford, rather than the maximum amount they can qualify for.

Read more: How much house can I afford?