Down payment on a house: How much should you pay?

To secure a house, you will need to make a down payment. But how much do you really need? Read this article to find out more

Down payment on a house: How much should you pay?

The down payment you make on your mortgage depends on various factors, including how much you can afford in the short term versus how much you are willing to pay throughout the life of the loan.

While making a 20% down payment on your mortgage may seem common, there are options. One option is a government-backed loan at 0% down, while another a down payment as low as 3% for some conventional loans. But be careful. Usually, the less you spend upfront, the higher your interest rate and monthly mortgage payments, not to mention the lower equity you will start off with. Here is everything you need to know about making a down payment on a home.

To our audience of mortgage professionals, this article can serve as a valuable tool for any of your clients who are asking about how much they will need for a down payment on a house you are helping them purchase. Send this along to them in an e-mail after helping them.  

Down payment on a house: How much do you need?

There is no one-size-fits-all answer to how much money you should put toward a down payment on a house. It is, however, important to know how it could impact your finances in the long-term, especially since it is one of the largest upfront expenses that you will make.

To figure out which down payment will best suit your financial situation, you might use a mortgage calculator.

One way to look at it is that if you put less money down upfront, you will likely be on the hook for higher fees and interest over the life of the loan. On the flip side, the more money you put down upfront the lower your fees and interest over the life of the loan.

Saving enough money to make a sizeable down payment will usually take time, meaning that a government-backed 0% down payment, or a conventional loan offering a low down payment (sometimes as low as 3%) may help you to speed up your home purchase.

Here are some considerations you should make when thinking about the down payment:

  1. Interest rates
  2. Home equity
  3. Monthly mortgage payments
  4. Upfront and ongoing fees

Here is a closer look at the factors that you should consider when thinking about a down payment:

1: Interest rates

If you make a smaller down payment, lenders may add a few fractions of a percentage point onto your interest rate throughout the life of the loan. The same is true if you make a larger down payment; lenders will shave a few fractions of a percentage point off your interest rate. The reason for the rise and fall in interest rate is the risk for lenders. If you pay more upfront, you are less of a risk—and lenders tend to reward this with lower interest rates.

2: Home equity

Home equity is the value of your home minus whatever you owe on your mortgage. Put another way, it is the difference between your property becoming an asset rather than a debt. When you make a larger down payment on a property, you immediately have more equity. And the more equity you have, the more wealth you have. The less equity you have, the less wealth you have.

3: Monthly mortgage payments

Your principal is lower if you borrow less of the price of your property (and means you will pay less in interest, as mentioned). Paying more toward the principal will help reduce your monthly mortgage payments throughout the life of the loan.

4: Upfront and ongoing fees

By guaranteeing a part of a mortgage, government-backed mortgage programs or low-down-payment conventional loans reduce risk for lenders. In other words, lenders are reimbursed by the associated government agency if you default on either of these loans. To offset a portion of the costs, these loans often carry with them significant one-time costs. Therefore, depending on what you decide, you may be on the hook for either high upfront fees or high ongoing fees.

The pros and cons of making 20% down payment

For many potential homeowners, making a 20% down payment on a home can seem next to impossible. After all, for a house that costs $400,000, that means you would be on the hook for $80,000 up front. On the plus side, there are not that many lenders that require 20% at closing. While it may not be required in many cases, however, if it makes financial sense, you should consider it.

But before committing to anything, it is important to weigh the pros and cons of making a 20% down payment. Here is a breakdown of both:

the pros and cons of making a 20% down payment on a house

Here is a more in-depth look at the pros of making a 20% down payment:

You can avoid PMI

If you want to avoid paying private mortgage insurance—which protects the lender should you default on your loan—you will have to make a 20% down payment. Keep in mind that, when you reach 20% equity in your house, you can ask the lender to remove the PMI, even if you did not put 20% down initially.

Equity is the amount of the property’s value that you own. Among the various ways that you can gain equity are:

  • The value of your property increases
  • You make enough mortgage payments to pay off the principal

Lenders typically cancel your PMI automatically after you have built at minimum 22% equity in your home.

Better interest rate

Your interest rate is what your lender will charge you every month for borrowing money. It is the outstanding balance on your mortgage or the percentage of the principal.

Essentially, lenders will view you as less risky if you make a higher down payment. Toward that end, putting down at least 20% on your mortgage at closing may allow you to access better/lower interest rates. And remember: an interest rate that is even one or two points less can save you thousands of dollars during the life of your loan.

Lower monthly payments

You will end up needing to borrow less money if you make a larger down payment, and the less you borrow, the lower your monthly payments will be. This should free up money for unforeseen expenses that may arise every month.

Read more: Average down payment on a house: Everything you need to know

Competitive edge over other home buyers

Most home sellers would usually rather work with home buyers who have made a 20% down payment since it shows the buyer’s finances are in order. This means that if you are the buyer, you will likely have less issue finding a lender and will therefore give you an edge over other home buyers.

Here is a more in-depth look at the cons of making a 20% down payment:

Greater financial risk

After you put down a larger sum of money, it can be difficult to get it back, if need be. Depending on your financial situation, you may want to put that extra money toward an emergency fund, if you feel you may need it for something important, and unforeseen, later.

Less money for repairs

New home buyers usually see homes that need minor repairs as a bargain, but the bigger your down payment, the less you will have leftover for additional repairs.

More time to save

Saving for a 20% down payment can take a long time, in some cases decades. Saving for that long can be especially costly if you are paying for rent at the same time. You may be better off purchasing a property now with a lower down payment than you would be saving for a 20% down payment paying rent at the same time.

grow the investment of a down payment on a house

What is the lowest down payment for a house?

For certain government-backed loans, you can make a 0% down payment. A 20% down payment, meanwhile, is fairly typical, and advised, if it makes financial sense for you. However, there are some conventional mortgages that require as little as 3% down payment.

Here is a look at the lowest down payments you can make on a house, depending on the mortgage you want to apply for:

0% down payment

VA mortgage loans, which are guaranteed by the US Department of Veterans Affairs, do not usually require a down payment. These types of loans are for acting veteran military service members and spouses who are eligible. Another government-backed loan that often requires no down payment is a USDA loan. These are backed by the US Department of Agriculture’s Rural Development program, and are for suburban and rural home buyers that meet the income limits of the program.

3% down payment

There are conventional mortgages out there that require as little as 3% down payment. Some examples of this type of loan include Home Possible and HomeReady. Unlike VA loans and USDA loans, conventional mortgages are not backed by the government, instead following down payment guidelines set by government-sponsored enterprises (GSEs).

3.5% down payment

Federal Housing Administration loans (or FHA loans) require as little as 3.5% down payment, but your credit score must be at least 580. FHA loans require a 10% down payment if your credit score falls between 500 and 579.

10% down payment

Jumbo loans typically require a 10% minimum down payment. These types of loans, which are outside of Federal Housing Finance Agency conforming loan limits, cannot be guaranteed by GSEs, meaning lenders often require higher down payments to mitigate some of the risks.

How much are closing costs?

Closing costs are the fees for services that helped to officially close the deal on the property. Typically, home buyers will pay between 3% and 4% of the sales price in closing costs.

Closing costs, for home buyers, often include a home inspection paid prior to closing day, as well as a home appraisal and other loan-related costs such as title insurance, origination fees, homeowners’ insurance and taxes.

The cost of home inspection—which is usually about the same as the home appraisal—is for a professional to examine the property to spot and issues or damages prior to buying. Both the home inspection and the home appraisal can cost anywhere from $280 to $400. Both these costs are essentially the lender’s assurances that the home is worth the money you are being lent.

Read more: Closing costs: What are they and how are they estimated?

Other closing costs such as taxes, title fees, and loan origination fees are typically much higher than inspection and appraisal costs. However, those higher closing costs are more difficult to calculate since they vary depending on where you are purchasing the property, though may cost 1% of the sales price of the property.

buying an older home with a down payment

Can I buy a house without a down payment?

Short answer: Yes, you can buy a house without a down payment, i.e., no money down. If you are in the market for a conventional mortgage, however, you will have to make a down payment. In order to get a zero-down conventional mortgage you would need to get a government-backed loan.

Government-backed loans are just as they sound. They are mortgages that the government insures, presenting less of a risk to lenders since the government will cover the financial loss in the case of a default. It also means that most lenders will offer more lenient down payment requirements and interest rates that are below average.

If you qualify for a VA loan or a USDA loan, you can currently purchase a property with no money down. If you are a former or current spouse of a member of the Armed Forces, you may also qualify for a VA loan. While both government-backed loans offer zero-down payment guarantees, you must meet the minimum requirements set by the Department of Veteran Affairs (VA) and the USDA.

As we have seen, knowing how much to make on a down payment can depend on multiple factors. If you know your own financial situation well—as well as the mortgage options available to you—then you will have the tools you need to make the right decision.

Have experience with making a down payment on a house? Let us know in the comment section below.