Capital InsightsFinancial Planning

A Financial Guide to Buying Your First Home

Buying a home is one of the most exciting – and financially significant – decisions you’ll ever make. Like any investment, it should be guided by a clear, thoughtful strategy. A successful home purchase is about more than finding the right property. It’s about making sure your decision aligns with your overall financial plan, long-term goals, and lifestyle needs.

From setting a realistic budget and choosing the right location, to building your down payment and maintaining an emergency fund, there are many factors to consider. Getting it right is a balancing act – but one that pays off with the right plan.

Rent vs. Buy: Is Now the Right Time?

The first question isn’t what you can buy – it’s whether you should buy. The three questions to ask yourself are:

  • Do you plan to stay in the area for at least 3 – 5 years?
  • Is your job or income stable?
  • Are you ready to take on the costs of homeownership beyond just a mortgage?

If the answer to any of the above questions is no, buying a home may not make sense for you right now. If you don’t plan on keeping the house long enough to recapture the various closing costs, renting might be a better option for you right now. You also want to avoid buying a home you can afford now if your future income is too uncertain. Finally, various other costs come with homeownership, like repairs and maintenance, so it’s important to account for these when thinking about cash flow.

How Much House Can You Afford?

If you’ve thought it through and determined a home purchase makes sense for you, the next step is figuring out what you can afford. Spoiler alert: it’s probably less than your mortgage pre-approval suggests (if you’ve taken that step). Lenders look at your gross income and may approve you for a mortgage that eats up a huge portion of your monthly cash flow. Simply put, you can afford the mortgage but nothing else, which is not a sustainable long-term position.

A few helpful rules of thumb:

  • Total housing costs (HOA, mortgage, real estate taxes, homeowners’ insurance) should be under 28% of your gross income
  • Total debt payments (car payment, mortgage, loans, etc.) should be under 36% of gross income – both annually and monthly

How Much Do You Need to Save?

The steps above will give you a sense of what price range you should be looking at, but there are so many different costs and fees involved in buying a house.

When budgeting for a home, there are two primary levers to consider: your down payment and your monthly mortgage payment. If you have substantial savings but limited cash flow, it might make sense to put more money down upfront to reduce your monthly payments. On the other hand, if your income is strong but your savings are more limited, a smaller down payment—such as 5% or 10%—could be a better fit. In a low-interest-rate environment, choosing a smaller down payment to take advantage of favorable borrowing terms can be a strategic move. On the other hand, a down payment lower than 20% will likely require private mortgage insurance, a temporary addition to your monthly payment until you reach 20% equity. You can play around with online mortgage calculators to determine what combination of down payment vs. mortgage makes the most sense for you.

Closing costs are additional costs involved in buying a home and they can be significant. Closing costs include things like lender fees, title services, prepaid taxes, seller’s agent fees, and more. In most cases, the seller instead of the buyer pays the realtor commission. A good estimate for a buyer’s closing costs is 3% to 5% of the home price.

The final costs in buying a home are those various other costs, like maintenance and repairs, that often come with owning a home.  You’ll want to make sure you’ve saved enough so that, after the purchase, you still have a home emergency fund on hand – just in case something unexpected happens, like a broken AC unit. A good estimate for repairs and maintenance on a home is 1-3% of the home per year.

If you’re heading into a period of tighter cash flow once your mortgage payments begin, it’s wise to aim for a larger emergency fund upfront because it may be difficult to replenish quickly if you need to dip into it. Also, this home emergency fund is in addition to a general emergency fund that keeps three to six months’ worth of expenses on hand in case anything happens to your income.

To sum up what you need to save up:

  • Down payment (5% to 20% of home price)
  • Closing costs (3% to 5% of home price)
  • Maintenance + repairs (1% to 3% of home price per year)
    • In addition to your 3-to-6-month emergency fund

A good way to get some more concrete information on these costs is to talk to a lender, who can help break these out into real numbers based on the area, the price range, and more.

How Does it Fit into Your Financial “Big Picture”?

Owning a home can help build net worth, so it may seem like a no-brainer in terms of your overall financial strategy. While it can be more financially productive than renting, it can also derail your longer-term goals without a good strategy.

One thing you do have discretion on is price. You can use factors like location, size and more to find a more affordable home. Because of this, it’s important to prioritize retirement and any other long-term goals you may have less discretion over.  Before you start saving up for a home, you should start with the basics of your budget:

  • Retirement contributions – ensure you’re contributing at least 10% of your income to retirement accounts before starting to carve out a savings target for a house
  • Know your monthly expenses so you can avoid building up any credit card debt and have a good sense of how these might change if you buy a house
  • Keep enough cash on hand for emergencies and any other known goals or big expenses

If you’re already on track with your budget, then you can start mapping out how to save for a home. There are two ways to strategize saving for a home:

  • Work backwards
    1. Determine your ideal home size, location and price range
    2. Determine what level of downpayment you want to put down and what level of monthly payment you can afford
    3. Look at how much of your discretionary income can go towards saving for this, still meeting your other financial goals and targets, and how long that would take you
  • Save as much as you can
    1. Save up as much of your disposable income as you can (again, while still meeting retirement and other savings targets)
    2. Periodically browse homes and prices to see how far your savings will get you

 

Other Strategies and Resources

Buying a home is a complex process with many moving parts and details to understand. While this post covers the fundamentals, it doesn’t touch on everything. Because the process can feel overwhelming, and there’s too much to cover in one post, below are some  resources to help guide you along the way:

*This can derail your longer-term goals if you don’t have enough saved up. See Fidelity’ s “How much do I need to retire?“ to better understand if this is a good plan for your big picture

 

Bringing It All Home

A house isn’t just a line item on your balance sheet — it’s where life happens. Yes, it should be a smart financial move, but it also needs to support the way you live, grow, and plan for the future. The best home purchase blends practicality with possibility: it respects your budget, aligns with your goals, and leaves room to adapt as life evolves. When you approach the process with clarity, intention, and flexibility, you’re not just buying property — you’re building a foundation for the life you want to lead.

 

Related