If you're a first-time home buyer, a smaller down payment of 5–10% is okay too—but then you will have to pay that monthly PMI fee.
It's better to put 20 percent down if you want the lowest possible interest rate and monthly payment. But if you want to get into a house now and start building equity, it may be better to buy with a smaller down payment—say five to 10 percent down.
A 3% down payment mortgage is available to everyone, but may be particularly beneficial for: First time homebuyers. Recently graduated students with high loans but a steady income. Lower-income individuals who can't put 20% down on a mortgage.
Downsides of a 20% Down Payment
Won't provide as much benefit when rates are low: If mortgage rates are low, you could potentially put that money to better use by investing it or paying down high-interest debt. That could be the case even if you have to pay PMI.
A lower down payment could mean you're able to buy a home months (or years) earlier. Saving up 20% of the purchase price of a home —at today's high prices — can take a long time for many of us. If you spend less on the down payment, you'll free up funds to cover the myriad of other transaction-related expenses.
FHA loans require as little as 3.5 percent, and VA loans and USDA loans have no down payment requirement at all. Most homeowners don't put 20 percent down. In 2022, the median down payment among homebuyers was 13 percent, according to the National Association of Realtors (NAR).
The average first-time buyer pays about 6% of the home price for their down payment, while repeat buyers put down 17%, according to data from the National Association of REALTORS® in late 2022. The median home sale price in the U.S. was $416,100 as of Q2 in 2023.
Depending on how much you put down, PMI can cost anywhere from 0.19–1.86% of your loan balance per year. It protects your lender—not you—in case you stop making payments on your loan. So when does PMI go away? As a general rule, you can get PMI removed once you have 20% equity in your home.
Key Takeaways. A house poor person is anyone whose housing expenses account for an exorbitant percentage of their monthly budget. Individuals in this situation are short of cash for discretionary items and tend to have trouble meeting other financial obligations, such as vehicle payments.
Nick Holeman, head of financial planning at Betterment, says a 20% down payment helps buyers avoid overextending themselves on their mortgage. A higher down payment reduces monthly payments, and Holeman says that allows buyers to save for other financial goals, like retirement. “Homeownership can be a great investment.
How much is a down payment on a 200K house? A 20% down payment on a 200K house is $40,000. A 5% down payment is $10,000, and a 3.5% is $7,000. Talk with various lenders to see what you might qualify for.
If you have a conventional loan, $800 in monthly debt obligations and a $10,000 down payment, you can afford a home that's around $250,000 in today's interest rate environment.
Higher Down Payment, Lower Interest Rate
If you do choose to invest more than 20 percent in your down payment, it's possible that you will gain access to a lower interest rate for your mortgage. Many lenders look favorably on homebuyers that are investing more of their own money and borrowing less.
On a $200,000, 30-year mortgage with a 6% fixed interest rate, your monthly payment would come out to $1,199 — not including taxes or insurance. But this can vary greatly depending on your insurance policy, loan type, down payment size, and other factors.
Given a choice, some buyers may choose to put down 20 percent, but others may not. "Especially as rates remain historically low with a buoyant stock market, there are many people who want to take advantage of getting maximum financing to be able to put their assets to work elsewhere," explains Alvarez.
So does making a higher down payment increase the strength of your offer? Yes; it shows more commitment to closing as you have more skin in the game and you have a higher chance of securing a mortgage.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
The 28% rule
The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (e.g., principal, interest, taxes and insurance).
How much house can I afford with 40,000 a year? With a $40,000 annual salary, you should be able to afford a home that is between $100,000 and $160,000.
If you've owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI cancellation. If you've owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.
When PMI is canceled, the lender has 45 days to refund applicable premiums. That said, do you get PMI back when you sell your house? It's a reasonable question considering the new borrower is on the hook for mortgage insurance moving forward. Unfortunately for you, the seller, the premiums you paid won't be refunded.
If home values have gone up in your area or you've made a lot of improvements to your home, you could have more than 20% equity based on the home's current value. Providing the loan-to-value ratio with a new appraisal value meets the lender's requirements, you may be able to get PMI taken off.
The National Association of Realtors (NAR) states that the average down payment on a house for first-time home buyers is 6% versus 17% for repeat buyers in 2022. However, the share of first-time buyers fell to 22% in 2022, dropping from 34% in 2021.
Given all of these factors, most experts recommend having a minimum of 6-9 months' worth of living expenses after closing. Some advise having up to 20% of the home's value leftover in cash reserves, though this is not practical for every home buyer. Ultimately how much you need depends on your own financial situation.
Saving up at least 20% to put down on a home can help you qualify for a conventional mortgage without the added cost of private mortgage insurance (PMI). This down payment threshold can also help you qualify for the best mortgage rates, which can lead to long-term interest savings as you pay off your home loan.