Down payments: Do you really need to put down 20%?

Putting 20% down on a house can be a good idea, but it isn’t mandatory.

Elissa

Elissa Suh

Published February 5, 2020

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KEY TAKEAWAYS

  • Down payments are part of mortgage closing costs

  • 20% isn’t required, but a bigger down payment reduces your monthly mortgage payment

  • State and local governments offer closing cost assistance to help first-time buyers make a down payment

If you want to buy a house, you’ll likely need to take out a mortgage, which is a loan specifically meant for purchasing a home. A down payment is cash you pay towards the purchase to reduce the amount of money you’ll have to get from the lender. (If you’re buying a car, you might similarly make a down payment and take out an auto loan.) As far as down payments go, you might have heard that 20% is the standard, but 20% isn’t necessarily required nor is it common. Mortgage lenders will almost always let you put down less and the average down payment is closer to 7%.

However, making a larger down payment has its advantages, since it’ll decrease your monthly payments and overall mortgage costs (including interest) over the lifetime of the loan. Putting at least 20% down also frees you from having to pay private mortgage insurance.

First-time homebuyers who don’t know how much money to put down can keep reading to learn how a down payment works and why it might be a good idea to put down as much as you can.

In this article:

How does a down payment work?

A down payment is the upfront cash that you pay towards the house or real estate property. Let’s say the home you want to buy is $400,000. Instead of asking the mortgage lender for that amount, you will pay a certain amount upfront — or make a down payment — and take out a mortgage for the remaining amount.

For example:

  • If you put down $80,000 — a 20% down payment — then your mortgage loan would be $320,000.
  • If you put down $40,000 — a 10% down payment — then your loan amount would be $360,000.
  • If you put down $20,000 — 5% down payment — then your mortgage loan amount would be $380,000.

As you can see, the more money that borrowers put down, the smaller the amount of the original mortgage loan. Your down payment is due at closing, at the end of the home buying process. We’ll look at how your down payment affects your monthly mortgage payment later.

How much of a down payment do you need?

The minimum down payment necessary may depend on the type of mortgage loan and the lender.

You only need to down payment of 3.5% for FHA loans, which are insured by the Federal Housing Administration. VA loans and USDA loans do not require any down payment at all.

Lenders may accept as low as 3% for conventional loans, while jumbo loans — loans greater than the conforming loan limits set by Fannie and Freddie Mac — may necessitate a larger down payment, given the size of the loan.

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Do you have to put 20% down on a house?

You aren’t required to put down 20% on a house, but there are many benefits to doing so:

Lower interest rate

Your mortgage rate is based on your financial standing (which includes your debt-to-income ratio and credit score), but it’s possible for your lender to give you a lower interest rate if you put down more than 20%.

You can see today’s mortgage rates here.

Less mortgage cost overall

Making a larger down payment means taking out a smaller loan, which ultimately means you’ll spend less in mortgage payments over time.

Look at the chart below to see how much you’d pay monthly and in total with three different down payment percentages. The figures are for a 30-year fixed-rate loan with a 3.65% APY.

Down payment5% down10% down20% down
Mortgage amount$380,000$360,000$320,000
Monthly mortgage payment$1,740$1,647$1,464
Total interest paid$245,800$233,860$206,990
Total mortgage cost$624,066$591,221$525,539

We got these numbers with our mortgage calculator, which you can use to see how much house you can afford.

More home equity

The more money you’ve paid toward the house, the more equity you’ll have in your home. Home equity is a great asset, which can be a source of funds when you’re strapped for cash (through a home equity loan, for example).

How much home equity you have is a combination of your loan-to-value ratio, or LTV, and the home’s value after appraisal. After paying your mortgage for a while, if your home equity is 30%, then your loan-to-value ratio is 70%.

No private mortgage insurance

Private mortgage insurance (PMI) is insurance for the mortgage lender. It protects the lender in case the borrower doesn’t make payments.

Borrowers of conventional loans who make a down payment of less than 20% are usually required to pay PMI. Mortgage insurance premiums are calculated as percentage of your overall loan amount, and are commonly tacked on to your monthly payments.

You can stop paying these insurance premiums once you reach 20% equity or an LTV of less than 80%. If you make a down payment of 20%, then you don’t have to pay PMI since you already have 20% equity and an LTV of 80%.

Mortgage insurance isn’t that expensive, especially if your credit score is high. For many people it still makes sense to take out a mortgage and pay mortgage insurance rather than not get a home because they couldn’t make a 20% down payment.

Mortgage insurance for FHA loans works differently. Learn more about it and private mortgage insurance here.

Down payment assistance

Down payments can be expensive and they’re just one part of the closing costs that comes with buying a home. However, state and local governments as well as non-profit organizations offer loan assistance programs for first time buyers to help cut down on these costs.

All loan programs vary: some may offer down payment assistance in the form of a grant, while others might simply offer a loan (albeit one with lenient terms) that you’d still have to repay. (Taking on more debt to pay down existing debt isn’t generally recommended.)

Not everyone can get down payment assistance — you’ll have to meet certain income and credit score requirements, and if you qualify you’ll have to take a homebuyer education course.

If you don’t qualify for loan assistance, you can get financial gift from someone like a relative to help you with the loan down payment.

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About the author

Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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