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Planning ahead

I want to buy a home one day. How can I get ready?

What are the benefits of owning a home?

Buying a home is a huge life milestone, in part because of what it signifies—permanence, stability, and putting down roots. But the main benefits of owning a home are arguably threefold:

1. Practical

Even if you don’t buy a home, you still need to pay for lodging somehow. For most people, this is in the form of monthly rent. When you buy a home and pay a mortgage, you’re saving into a permanent asset that has the potential to appreciate over time. Plus, you get automatic protection against rising rent costs.

2. Financial

Owning your home comes with a few potentially significant tax breaks.

Mortgage interest deduction: While you don’t get a tax deduction for paying rent, as a homeowner you can deduct the interest you pay on up to $750,000 of your mortgage balance.
State and local tax deduction: You can also deduct up to $40,000 in property taxes.
Capital gains exclusion: When it comes time to sell your home, you can exclude capital gains up to $250,000 (or up to $500,000 if you file a joint tax return with your spouse).

Keep in mind that these benefits vary by state. For questions about your specific situation, it’s smart to speak with a tax professional.

3. Emotional

The most significant benefits to owning your home are not necessarily financial. Maybe you want to buy a home because it’s a place to call your own that gives you the freedom to live the life you want. Maybe you place a high value on the sense of permanence that often comes with homeownership. In short, your reasons are often justifiably emotional, which is why the case for buying a home can’t be solely rationalized by a financial model.

Deciding between buying and renting

Buying and renting both have their upsides. Here’s a look at how some of the main benefits of each stack up.

Benefits of buying a home

Locking in some of your housing costs (although your insurance costs and taxes can still change over time)
Potential home value appreciation
Potentially significant tax benefits
Emotional benefits & stability

Benefits of renting

Greater flexibility to change locations
Greater flexibility to rent more or less space
Lower up-front costs than buying, leaving you more money to invest
Potentially lower monthly costs

You can also use a calculator like this one from Freddie Mac to help make your decision.

Our rule of thumb:

If you can afford the down payment on a home that is likely to appreciate, you plan to hang onto the property for at least five years, and you want to buy, it’s reasonable to go for it. Why five years? That’s a rough estimate of the amount of time it takes for housing appreciation to outweigh your transaction costs.

How does buying a home fit in with my other goals?

If you’re like most people, you have multiple financial goals—some in the near future (a new car, a vacation), and others that are further away (retirement). Homeownership is likely just one of them. It’s important to think about the relative prioritization and timing of your goals to ensure buying a home will allow you to stay on track.

Start on the right foot

Before you buy a home, there are some foundational steps you should take to get your finances in order.

1. Ensure you have an adequate emergency fund

A good emergency fund, which we define as 3-6 months’ worth of expenses, can help you navigate financial setbacks like a large medical bill or job loss. You should have this in place before tackling any other financial goals.

2. Tackle your high-interest debt

Before you start saving for a home, it’s smart to put money towards paying down any high-interest loans. There are differing opinions about what constitutes a “high interest loan,” but as a rule of thumb, you might want to consider paying down loans with interest rates greater than 8%, such as credit card debt.

3. Get your 401(k) match

Next, consider contributing to your company-sponsored 401(k) if your employer offers a matching contribution. An employer match is basically free money, making it much more attractive to participate.

Map out your longer-term priorities

After you build your emergency fund, pay down high-interest debt, and maximize your 401(k) match, it’s time to understand what your longer-term financial priorities are. These are highly individual, but they could include:

Do you want to cover your children’s college education costs in full?
What about having a comfortable lifestyle in retirement?
Do you need to buy a home sooner rather than later?

Next, consider which goals are most important to you. Once you’ve decided the relative importance and timing of these priorities, you can then determine how much of your savings to allot to each goal. Let’s look at an example of how this can work:

Example: Alex and Taylor

Alex and Taylor, an imaginary couple in their early thirties, want to buy a home. They have a solid emergency fund and have already paid off their high-interest credit card debt. Now, they’re grappling with how to allocate their remaining savings between a down payment and their other long-term goals.

Their priorities:

1. Homeownership: They hope to buy a house in the next three to five years and put down at least 20% to avoid the need for private mortgage insurance.

2. Retirement: They want to retire comfortably between the ages of 55 and 60—the earlier, the better.

3. Travel: Each year, they take at least one international trip which costs about $10,000. They’d like to continue this.

The tradeoffs:

The table below shows three potential approaches Alex and Taylor could take to their priorities, and what impact each would have on their financial goals. Keep in mind that this is an extremely simplified example meant to illustrate tradeoffs, not provide commentary on how much to save for various goals.

Approach	Impact on home purchase	Impact on retirement savings	Impact on travel
Save aggressively for a home: Set aside the majority (~75%) of their savings for a down payment, ~15% for retirement, and ~10% for travel.	Shortest timeframe: They’re easily able to save up a 20% down payment within three years.	Slower growth: There is less money available for retirement accounts beyond their 401(k) match. Retiring by 60 is a stretch.	Reduced travel: They skip or significantly scale back some international trips.
Take a more balanced approach: Allocate ~40% of savings to down payment, ~30% to retirement accounts, and ~30% to a travel fund.	Medium timeframe: It takes two extra years to hit their 20% down payment target, meaning they purchase a home in five years.	Steady growth: They maintain a good rate of retirement savings, but likely will need to retire closer to 60.	Maintained travel: They can still take one international trip per year.
Prioritize travel and retirement: Save ~20% for a down payment, ~50% for retirement, and ~30% for travel.	Delayed timeframe: They delay purchasing a home beyond their original timeframe, or they make a smaller down payment (and accept a higher monthly mortgage payment/PMI).	Most growth: They are on track to retire by 55 or even significantly earlier.	Increased travel: They can increase the number of international trips they take per year.

How to avoid feeling “house poor”

Irwin Marrero, Wealthfront Mortgage Operations Lead

Wealthfront Mortgage Operations Lead Irwin Marrero (NMLS #891539) weighs in on how (and why) to avoid overspending on housing.

You’ve probably heard the phrase “house poor” before—it refers to the situation where someone is spending so much on housing that they’re unable to meet other financial commitments and save for other goals. Often, this means they’re spending significantly more than 30-40% of their pre-tax income on housing. They might have to forgo both near-term expenses (a vacation, a car repair) and long-term goals (setting aside enough for retirement) just to keep up with their housing costs.

Years ago, I experienced this firsthand when I bought my first home and when I took on a mortgage payment that stretched my comfort zone. When combined with the unexpected repairs that inevitably come with owning a home, that tight budget quickly became a financial bottleneck that forced me to put other priorities on hold.

Looking back, this experience reshaped my approach to homeownership by teaching me the importance of a strong safety net and buying comfortably below your limits. Preserving that financial breathing room protects your other goals and ensures your home remains a place of comfort rather than a source of stress.

What can I do early to be prepared?

Even if a home purchase isn’t in your immediate future, there are a few things you can do to better prepare far in advance.

Pay down any and all debt

When you pay down your debt, you decrease your debt-to-income (DTI) ratio. This is a key input in determining the terms and interest rate for your mortgage.

Start with your highest interest debt—in many cases, this will be credit card debt.
Remember: Paying off debt with a 10% interest rate is like getting a guaranteed 10% return on your money.

Start improving your credit score

Lenders use your credit score to assess the risk they take on when giving you a loan. They use it to determine whether you qualify for a mortgage and what interest rate you’ll pay. A healthy credit score is 740 or higher, and you’ll get the best interest rates with a 780 or above. This resource from the Consumer Financial Protection Bureau can help you figure out your score. To increase your score, you can:

Set up bill payment reminders to avoid late payments.
Stay well below your credit limit.
Build a long history of paying off loans on time.

Save intentionally

This might seem like a no-brainer, but everyday expenses can get in the way of proactively saving for larger goals. By defining a monthly amount to put towards a home and depositing it in an appropriate savings or investment account, your future won’t become an afterthought.

Consider setting up a dedicated account for home savings and making automated transfers on a regular basis.
If you get a raise or bonus, consider increasing the amount you contribute to your home savings.

Time can be your friend. A longer time horizon means more time to save for your down payment and build up your credit score. But don’t forget about your living expenses in the meantime: Be sure to factor rent and other household expenses into your savings plan.

How should I invest my home savings?

Risk and potential reward are correlated, and there are many ways you might decide to save or invest the funds you’re setting aside for a future home purchase. The key is to balance growth potential with risk, and the right option for you depends largely on your time horizon.

If you plan to buy within three to five years

Markets can be volatile from year to year. In fact, our analysis shows that there could be a 25.2% probability of loss for investments held for just one year. For near-term home purchases, it’s prudent to stay out of the markets to avoid a potential downturn. If your home purchase is in the next three to five years, consider investing funds for a down payment in a lower-risk option, such as a high-yield savings or cash account, low-risk fixed income product, certificates of deposit (CDs), or a money market account. These options can all help your savings grow without exposing your savings to a lot of market risk.

Whether you treat three years, five years, or something in the middle as the cutoff depends in part on how flexible the timing of your home purchase is. For instance, if you want to buy in exactly five years and don’t have the flexibility to wait out a market downturn, then you might want to keep your home savings in cash—even if it means forgoing potential returns.

If you plan to buy more than three to five years from now

If your time horizon is longer (or more flexible), you can likely afford to take on more risk. For home purchases that are at least three to five years away, consider investing your money in a long-term globally diversified investment portfolio, which can deliver higher returns than short-term savings options. As you get closer to purchasing a home, we suggest moving money from your investment account to a safer, low-risk option, as mentioned above.