How Much Down Payment Do You Really Need?

If you’re getting ready to buy your first home, then you’ve probably started to wonder about down payments. Like most things involved in buying a new home, how much of a down payment you need will largely depend on your budget and the type of home you’re interested in buying.
Rather than play some sort of financial roulette and wind up with unexpected expenses later on, I’ve compiled this list of down payment basics. Here’s the full scoop on how much of a down payment you need and the answers to your questions.

'How much down payment do I really need?'

This million-dollar question has a simple answer and a not-so-simple one. Let’s start with the simple one: In an ideal world, you’ll want to save at least 20% of a home’s purchase price as a down payment. For example, on a home that costs $350k, you’d want to save at least $70k as a down payment. If this sounds like a lot, that’s because it is, but there’s also a very good reason to try and save up the entire 20%.
Typically speaking, when someone doesn’t have 20% to put towards a down payment, they’ll often end up paying for something called private mortgage insurance (PMI). This acts as insurance for your mortgage lender, and it doesn’t come cheap. On average, PMI costs borrowers anywhere from 0.5% – 1% of their loan amount per year. This means that rather than paying down the principal and interest on your mortgage, you’ll be making large monthly payments to a mortgage insurance company. This is why many people choose to either save up the full 20% whenever possible or explore lending options that don’t require such large down payments. Let’s crunch some numbers to see what all this looks like on a month-to-month basis.

Calculating monthly payments

In 2020, the median home price was just under $281k — so I’ll use this number in the following example. Assuming you have that 20% saved up for a down payment on your $281k home, and your credit score qualifies you for a competitive interest rate of 2.84% on a 30-year fixed-rate mortgage, this is what your monthly payment would look like.
Listing price$281,000
Down payment (20%)$56,200
Monthly payment$928
Keep in mind that these calculations have been made using a relatively low interest rate, and for borrowers with less than good-to-excellent credit, a higher interest rate is more likely. Despite the lower interest rate and having that 20% down payment (which puts your initial home loan value at $224,800) you’d still end up paying roughly $334,252 over that 30-year lending period, which places your monthly payments at just over $900.
Now let’s take a look at what the same house would cost you over 30 years if you needed to take out private mortgage insurance. For this example, we’ll use a low down payment of 5%, with the same 2.84% mortgage rate.
Listing price$281,000
Down payment (5%)$14,050
Monthly payment$1,103
Because you put less towards your down payment amount, in this example you’d have a higher principal balance of $266,950, placing your overall mortgage loan value at roughly $396,924 for those 30 years, with monthly payments of $1,103.
This is already quite a bit more money than the previous example with 20% down, but now let’s add on the payments you’d owe for your private mortgage insurance.
Monthly mortgage paymentMonthly PMI payment (0.05% annually)Total monthly payment
As you can see from these rough calculations (which you can also do yourself using a mortgage calculator), private mortgage insurance is a fairly expensive way to go about financing a home— especially when combined with a higher monthly payment, as is often the case. This example also uses a relatively low PMI that charges only 0.05% per year — when in fact, PMI can easily cost 1% of your loan amount per year.
If all of these numbers have you feeling discouraged — don’t be. There are plenty of options out there for would-be homeowners who don’t have the full 20% down payment saved up. I’ll dive into those next.

'What happens if I can't afford a big down payment?'

If you can’t afford the full 20% down payment on a home, you still have several down payment options as a borrower that don’t include paying an arm and a leg for mortgage insurance premiums.

Alternative financing

The first of these options is to look into alternative loan types (other than your typical conventional loans offered by Fannie Mae and Freddie Mac) like VA loans (for veterans) or even FHA loans, which are sponsored by the Federal Housing Association. These types of mortgages can help first-time homebuyers secure financing without the need for a large down payment, or private mortgage insurance. They also require lower loan-to-value ratios (LTV) than typical conventional loans.
If you meet their eligibility requirements, they may also offer support when it comes to things like down payment assistance, and paying for closing costs. If you’re struggling to make ends meet and not sure how you’ll meet minimum down payment requirements, talk to your mortgage lender about alternative forms of financing and find out what you may qualify for.

Lower your budget

If you don’t qualify for any special financing, another option is to simply lower your budget. While you might have always dreamed of living in a house in a certain neighborhood, that doesn’t mean your dream home is an impossibility — it just means that it might not be an affordable option right now. Remember, the most important thing when buying a home is choosing the best mortgage that you feel comfortable paying every month. This brings me to another option.

Spend more time saving up

If you absolutely don’t want to sacrifice your dream home or budget, the answer is simple: Just spend more time saving up. Saving up for a larger mortgage down payment on your dream home (to avoid paying private mortgage insurance) is a great way to make your future monthly payments more manageable — and ensure a happier, less stressed you when it comes time to buy your new home.

'How can I save that much for a down payment?'

Saving up for a down payment doesn’t have to be a complicated or painful process. Here are a few ideas to help you get started.

Find a budget that works for you

The first step in saving more money for your down payment is to find a budget that works and stick with it. There are so many different ways to budget your income, from using a top-rated budgeting app or even just manually creating categories of spending with a traditional envelope budgeting method. Whatever budgeting style you choose, just be sure it’s something you can stick to in the long run — since this will give you the best chance of meeting your savings goals.

Set up a dedicated savings account

Another way to save more money for a down payment on your dream home is by setting up a dedicated savings account for that exact purpose. By having a special savings account just for this, you’ll be much less likely to tap into that money for other things. You’ll also be able to easily track your progress and watch that account grow closer and closer towards your meeting your goal.

Enroll in automated savings deposits

Once you have your savings account set up, go the extra mile by enrolling in automatic savings deposits. This will help ensure that you put so much money aside every pay cycle towards meeting your goal. Set your deposit to happen as close to payday as possible, that way you won’t miss seeing the extra money in your account, and in the meantime, your down payment fund will be steadily growing.

The bottom line

Down payments are a challenging part of buying a home for anyone, but by mapping out your finances early, you’ll be one step closer to setting aside enough of a down payment to afford your dream home, without having to pay extra mortgage insurance premiums.
Already have a mortgage and want to know more about your options for home equity loans or a refinance package? Check out our other articles on finding the best mortgage for your needs.

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