Main Content

Deciding Your Mortgage Down Payment: How Much of a Down Payment Do You Need When Buying a Home?

Buying a home can be an exciting time for most of us. Calculating a down payment, or even deciding if you really need a down payment, can be stressful, however. I’ve purchased two homes in my life and for the first one, my husband and I didn’t put down payment on the purchase; for our second home, we did. How do you know what’s right for you? Some of the questions to whether or not a down payment is necessary or beneficial are answered below.

Do I have to put 20% down for the purchase of a home?
Many first-time home buyers believe they must put down 20% on the purchase of their first home, but I’m going to let you in on a little secret – The “20% Rule” is a myth. For many lending institutions, a 20% down payment on a home reduces their risk, but many first-time home buyers put down 6%-7%, and some put down as little as 3% (Green, 2021).

What if I can’t afford a down payment?
In a perfect world, we would all qualify for a zero-down mortgage. However, most borrowers need at least 3% down for a conventional mortgage or 3.5% down for an FHA loan (Green, 2021). When my husband and I purchased our first home, we qualified for a VA loan, which required no down payment. This worked out well for us as first-time buyers with a small child.

What is the benefit of putting 20% down on a mortgage?
The down payment you make on your home depends on several factors, not the least of which are your personal finances and the real estate market where you plan to purchase. Putting 20% down lowers your monthly mortgage payments, lowers your mortgage rate, and allows you to avoid mortgage insurance (Yale, 2021). If you can make a big down payment, this may save you money over the life of the loan.

What are the disadvantages of putting 20% down on a mortgage?
While it may seem that putting 20% down is the better option, it’s not always true. It can take years to save 20% when home prices rise and could drain your savings for emergencies or home repairs. Also, putting 20% down is a risky move if home values drop (Yale, 2021).

PMI? What’s that?
Private mortgage insurance (PMI) is a type of insurance that conventional mortgage lenders require when home buyers put down less than 20 percent of the home’s purchase price. While PMI is designed to protect mortgage lenders, there are exceptions that allow you to avoid paying it, even if you aren’t making a 20% down payment. Having to pay PMI may not be ideal, but the benefit is the ability to buy a home without waiting to save up for a 20% down payment. PMI may also be tax-deductible (Wichter, 2021). Check with a tax professional for current tax laws regarding PMI.

More good news about PMI is that you don’t have to pay it forever. Building equity in your home, getting your home appraised if its value has appreciated, and refinancing your mortgage with a lower interest rate are ways you can stop paying PMI (Wichter, 2021).
If you are ready to buy a home and you have questions about how much you may need for a mortgage down payment, contact an agent at Premier Properties. We will help you every step of the way with the purchase of your new home!

Premier Property: Your Property, Our Priority.