How to Own Your Dream Home

Some folks use the concept of a dream home as an excuse to go wild and buy a property way beyond their means. That’s a recipe for disaster. Being dream-house poor is still being house poor. Here’s how to buy a dream home you can actually afford.

How to Buy Your Dream Home in 6 Steps

1. Cover the Financial Basics First
2. Figure Out Your Home Equity
3. Set Your Dream-Home Budget
4. Find the Right Home
5. Prepare Your Offer
6. Negotiate and Close

How Do You Prepare Financially for a Dream Home?

Get on a budget, get out of nonmortgage debt (Baby Step 2) and build up an emergency fund of 3–6 months of expenses (Baby Step 3). Sounds pretty basic, right? If you haven’t completed these steps, then you’re not ready to upgrade to your dream home . . . yet.

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Now, when you’ve got house fever, it can be hard to focus on paying off debt or saving an emergency fund before you upgrade your home—especially when you’re feeling the pressure of rising home prices and interest rates.

But whether it’s your second or third house, you should only buy a home when you’ve covered the financial basics we mentioned above. Then you’ll be ready to start the journey toward owning your dream house.

And that journey starts with your home equity. What’s equity? Well, we’re glad you asked . . . that brings us to the next step.

How Much Home Equity Do You Have?

Home equity is your current home’s value minus whatever you still owe on your mortgage.

Similar to other long-term investments (like retirement accounts), homes gradually increase in value. There have been periods of ups and downs in the market to be sure, but the value of real estate has consistently gone up. The average sale price of a home has increased by around 48% in the last decade (2015 to 2025).¹ As your home increases in value, so does your equity. In real estate terms, this is called appreciation.

Other factors that increase your home’s equity include:

• Added value: Home improvement projects like adding square footage, updating fixtures and appliances, or even just slapping on a new coat of paint can add value to your home.
• Mortgage paydown: Paying down your mortgage not only gets you out of debt faster, it also builds your equity. The less you owe on your home, the more equity you have.

The amount of equity you have gives you a pretty good idea of how much money you’ll end up with after selling your house. You can use that money to make a hefty down payment and cover the other costs that come with buying a home.

So, how do you determine your home’s value? Ask a trusted real estate agent to perform a competitive market analysis (which they’ll do anyway if they’re helping you sell your house), or get a professional appraisal.

Finding out your home’s equity will involve a little math, but it’s third-grade-level stuff, so don’t sweat it.

Here’s what we mean. Let’s say your home’s current value is $400,000. When you sell that house, you might pay 1–3% of the sale price in closing costs, and then pay off your mortgage.²

You’ll also have to pay your real estate agent, and some sellers sweeten the deal by offering to pay the cost of the buyer’s agent too. For this example, we’ll say you make that offer and pay a total of 6% in agent commissions (that’s 3% per agent).³

This is how the numbers would work out:

That means you can estimate clearing around $264,000 from selling your house. That’s a killer down payment on your dream home! And if your home is paid off, that’s even more money to put down and use to pay for things like repairs and moving expenses.

How Do You Budget for a Dream Home?

Keep your mortgage payment to no more than 25% of your take-home pay on a 15-year fixed-rate mortgage, along with paying a down payment of at least 20% to avoid PMI. Never get a 30-year mortgage even if the bank offers it (and they will). You’d pay a fortune in interest—money that should go toward building your wealth, not the bank’s.

So, let’s say your take-home pay is $4,800 a month. That means your monthly mortgage payment shouldn’t be any bigger than $1,200. By the way, that 25% figure should include principal, interest, taxes, insurance, PMI (if your down payment is less than 20%), and homeowners association (HOA) fees.

Plug your numbers into our Mortgage Calculator to see how much house you can afford.

And don’t forget to budget for all those other costs that come with the home-buying process in addition to your closing fees—things like moving expenses and any upgrades or repairs you might need to make. You don’t want these hidden costs to catch you off guard or drain your emergency fund. To make this easier on yourself, try our free EveryDollar budgeting app.

How Do You Find the Right Dream Home?

First, hire an experienced real estate agent you can trust. Good agents have connections that can help you find homes for sale as soon as they hit the market—or even before. Then, write a list of features that make a home fit your budget, lifestyle and dreams—and stick to it throughout your house hunt. Here are a few ideas to get you started.

• Don’t compromise on location and layout. If you plan to be in this home for the long haul, an out-of-the-way neighborhood or a wacky floor plan is a deal breaker. Look for a community and layout that’ll suit your lifestyle now and for years to come.
• Think about how much space your family needs. While your budget has the final say about how much home you buy, you’ll want your dream home to fit your family’s needs through different life seasons.
• Consider the school districts. If you have or want kids, the quality of the nearby school districts is probably already on your mind. But even if you don’t have kids or you’re retired, keep in mind that having good schools nearby could increase your home’s value.
• Look for a house that’ll grow in value. Are home values rising in the area? Is the number of businesses going up? These factors can help you figure out whether your dream home will turn into a good investment.
• Count the costs. Want that fancy master bathroom with the multiple showerheads and the Jacuzzi tub? Be clear on what’s a must-have and what’s nice to have. And don’t forget, upgraded features like that will make your dream home more expensive.

How Do You Get Ready to Make an Offer?

To make a strong offer, get preapproved for a mortgage (do this before you go house hunting), have your earnest money deposit ready, and line up a great real estate agent so you can move fast on the right house.

• Be preapproved for a 15-year fixed-rate mortgage. Having preapproved financing is a green flag for sellers—especially in multiple-offer situations. And because this puts most of your information in the lender’s system, you’ll be on the fast track to closing once your offer is accepted.
• Offer earnest money with your bid. Earnest money is a deposit to show you’re truly interested in a home. Usually it’s a small percentage of the home’s purchase price and it’s applied to your down payment or closing costs. Even if the deal falls through, you can almost always get most of it back.

• Rely on your trusted estate agent. You want an agent who understands your budget, knows which contingencies to include in your offer, and refuses to settle for “good enough.” They’re as committed to your dream as you are and will have your back throughout the entire process, no matter what it takes.