How much money should you put down on a house?
There’s no one-size-fits-all answer to this one and it’s going to depend on a number of factors, including the type of mortgage you want and your personal financial circumstances.
Below, we’ll explain how to assess your situation. And you’ll be in a much better position to make a smart, informed choice over the size of down payment that suits you best.
- What is a down payment?
- Minimum down payment by mortgage type
- Pros and cons of different sized down payments
- Benefits of a 20% down payment
- How much down payment is required to avoid private mortgage insurance (PMI)?
A down payment is a deposit you put down when you buy a home.
It represents the initial ownership value that you have in your home. That’s your equity, which is the amount by which the value of your home exceeds your mortgage balance. So, if you put down 50%, you start off with an ownership interest of one-half. With 20% down, you own one-fifth. And so on.
From a lender’s point of view, the bigger your down payment, the more invested you are in your home. And that means it’s more likely it is you’ll do everything possible to protect what may well be your biggest asset.
Better yet for the lender, a big down payment means a deep cushion if things go wrong. So, if you lose your job and can’t pay the mortgage, it’s likely that your lender will get their money back in the unfortunate event that they have to foreclose on your home loan.
With such a low risk of loss, it’s no wonder that mortgage lenders typically give preferential mortgage rates to those with large down payments.
Those rate reductions usually come in 5% increments. So if you have 8-9% down, you might think about increasing that to an even 10%.
So there are usually real advantages to exceeding the minimum down payment required for any particular type of mortgage. But many homebuyers — and especially first-time ones — don’t have that luxury.
So, at the minimum, how much of a down payment should you make upfront on a house? It will vary depending on what type of mortgage you’re seeking.
Loan programs have the following down payment requirements:
Conventional mortgage*: 3% minimum. But you’ll likely get a better rate with 5%, and will escape mortgage insurance completely with 20%.
FHA loans: 3.5% minimum. Backed by the Federal Housing Administration. These are typically for people with credit scores too low to get a conventional loan. And with conventional loans, you’ll get lower interest rates with a bigger down payment, and you’ll pay mortgage insurance if your down payment is less than 20%.
VA loans: 0% minimum. Backed by the Department of Veterans Affairs and available almost exclusively to current servicemembers and veterans. Typically a great choice, if you’re eligible. No continuing mortgage insurance.
USDA loans: 0% minimum. Backed by the U.S. Department of Agriculture and available if the home is in an eligible location (suburban and rural areas), and your income is close to or lower than the median for the area. You’ll also need to pay mortgage insurance.
Jumbo loans: Most lenders require at least 20%-30% down. Outsized, private-sector mortgages for those buying expensive homes. Shop around if the down payment your lender requires is too high as some lenders may have more flexibility.
*A conventional mortgage is one that conforms to the rules set by Fannie Mae and Freddie Mac, whether or not one of those actually guarantees it. Most 30-year, fixed-rate mortgages are conventional ones, as are some others.
Below, we’ll go in-depth on the major advantage of a 20% down payment: avoiding mortgage insurance.
But there are some other important advantages to a large down payment, along with some inevitable drawbacks.
Pros of a large down payment
Lower monthly payments. Besides saving with a lower mortgage rate, you’ll be borrowing less overall and therefore paying back less each month.
Bigger and better home. You can afford a more expensive home with the same monthly payment if you put more down more.
Cheaper borrowing. The less you borrow, the lower the total cost of the interest you’ll pay over the lifetime of your mortgage.
Cons of a large down payment
Overstretching yourself. You need to keep back money in a savings account, including an emergency fund. Because it can be hard to access your home equity if you need it.
Losing investment opportunities. The more of your money you tie up in your home, the less money you have to ride a stock market boom or invest in a start-up.
Making bigger losses if home prices fall. The bigger your stake in your home the bigger your loss if its value of the real estate drops. Those with low down payments let the lender shoulder more of the risks of the housing market.
And there’s another potential downside. Perhaps counterintuitively, you get a lower return on your investment, the bigger your down payment.
The return on investment puzzle
For a more in-depth explanation of this, check out “Before Making A 20% Mortgage Down Payment, Read This.”
But here’s a high-level explanation, based on a $400,000 home that increases in value to $420,000 over a year:
- With 20% down on the home, or – $80,000, y: Your rate of return is 25%. (Your $20,000 profit is 25% of your $80,000 investment.)
- With 3% down on the home, or – $12,000, y: Your rate of return is 167%. (Your $20,000 profit is 167% of your $12,000 investment.)
Even allowing for a higher rate and mortgage insurance, you might make 105% with 3% down, as opposed to 25% with 20% down.
This might not be enough to convince you to make a smaller down payment. The whole idea of a mortgage is to build equity over time and you’ve still made $20,000 either way. But it’s a tradeoff to be aware of.
In addition to giving you access to lower mortgage rates, a 20% down payment can enable borrowers to avoid private mortgage insurance.
Mortgage insurance is a continuing, monthly charge for homeowners who put down less than 20%. And it’s one that protects the lender rather than you, even though you’re the one paying it.
But mortgage insurance isn’t all bad. It can make homeownership possible for people who haven’t yet saved a 20% down payment. And depending on where you live, you might pay a few hundred dollars a month for private mortgage insurance while accruing much more in home-price appreciation.
But there are some programs that can allow you to escape mortgage insurance, even if you don’t have 20% of the new home purchase price to put down.
VA loans are a special case
There are no continuing mortgage insurance monthly premiums for those with VA loans, even if you put down nothing. Instead, there’s a VA funding fee.
That’s 2.3% of the loan amount for first-time use, and 3.6% for subsequent uses, payable on closing. However, you can often roll it up into your new mortgage.
How much does mortgage insurance cost?
The cost of mortgage insurance depends on the type of loan you choose and the amount you borrow. Here are some examples. However, actual amounts vary by mortgage rate and credit score, so model yours using a mortgage calculator. And then confirm it when you get your mortgage quotes.
With FHA loans, you usually pay an initial premium on closing of 1.75%, followed by an annual premium (paid monthly) of 0.85%. On a $289,500 loan (a $300,000 home with a minimum down payment of 3.5%), you could be looking at about $200 a month in extra costs due to mortgage insurance.
For conventional loans, you pay no initial premium on closing but 0.19-1.86% annually, again payable monthly. For the same mortgage example, that could be $280 a month.
For a USDA loan, there’s a 1% initial premium then 0.35% annually. That works out to about $80 a month.
When can you stop paying mortgage insurance?
In the past, you could stop paying mortgage insurance premiums when you’d made enough mortgage payments — or enjoyed enough home-price appreciation — that your home’s value exceeded your mortgage balance by the required amount. And you still can, for conventional loans.
But that’s no longer the case for FHA loans. Mortgage insurance stays attached to those mortgage loans until you:
- Pay off the loan
- Move and sell the home
- Refinance to a loan without mortgage insurance
Unsurprisingly, many choose the third option: refinancing.
Most people only escape mortgage insurance by making a down payment of 20% or more — or by waiting until their equity reaches the required amount. Then they can stop paying premiums or refinance, depending on their type of loan.
But some lenders offer ways around this:
1. Lender-paid mortgage insurance. The lender picks up the tab for the premiums. However, these loans come with higher mortgage rates, so you end up paying for mortgage insurance anyway.
2. Piggyback loans. You borrow the difference between your savings and a 20% down payment with a second mortgage. For instance, you can secure a second loan for 10% of the purchase price and pay 10% down. This is known as an 80-10-10 loan.
But both those options tend to be costly. The first typically brings a higher mortgage rate and the second a further loan to maintain.
But for some homebuyers, these alternatives can be attractive. And remember that if you don’t pay PMI, you can expect to pay a higher interest rate which means higher monthly mortgage payments.
Down payment assistance programs
There are down payment assistance programs in every state that may enable you to make a larger down payment than you otherwise would.
So how much should you put down on a house?
All the above is the essential information you need to know when deciding how big of a down payment to make. Ultimately it’s a decision determined by your unique financial situation and your choice of mortgage program. And you should now be better equipped to make an informed home buying decision.