Down Payment: How Much Do You Really Need?
“You need 20% down to buy a house” is the most expensive myth in homebuying. Most buyers put down far less, on purpose. Here’s what the actual rules are, what each option costs, and how to pick the right number for your situation.
The 20% myth, briefly
20% became famous because that’s the threshold below which conventional lenders typically require private mortgage insurance (PMI). It is not, and never has been, a minimum to get a mortgage. The median first-time buyer down payment in the U.S. has hovered around 6–8% for years; the median across all buyers (including repeat buyers using sale proceeds) is around 13–17%. Almost nobody actually puts 20% down on their first home.
Down payment minimums by loan type
- VA loan: 0% — no down payment required for eligible veterans, active-duty service members, and qualifying spouses. No PMI either, but there’s a one-time funding fee.
- USDA loan: 0% — no down payment for eligible rural and some suburban areas. Income limits apply.
- FHA loan: 3.5% with a credit score of 580+, or 10% with 500–579. Mortgage insurance (MIP) required for the life of the loan in most cases.
- Conventional 97 / HomeReady / Home Possible: 3% — first-time-buyer programs from Fannie Mae and Freddie Mac. PMI required until you reach 20% equity.
- Conventional standard: 5% minimum. PMI until 20% equity.
- Jumbo loans (above the conforming limit): typically 10–20%. Lender-by-lender; some require 20%+ on very large loans.
The trade-off matrix
Every dollar of down payment has three competing claims on it: avoiding PMI, lowering your monthly payment, and preserving liquidity for emergencies, retirement, and other investments.
| Down payment | Monthly impact ($400k home, 6.5%) | Trade-off |
|---|---|---|
| 3% ($12,000) | ~$2,453 P&I + ~$162 PMI | Keep almost all your savings, but +$162/mo for years. |
| 5% ($20,000) | ~$2,402 P&I + ~$158 PMI | Modest savings; PMI almost identical. |
| 10% ($40,000) | ~$2,275 P&I + ~$120 PMI | PMI shrinks; you can drop it sooner. |
| 20% ($80,000) | ~$2,022 P&I, no PMI | $430/mo cheaper than 3%, but $68k of cash gone. |
| 30% ($120,000) | ~$1,769 P&I, no PMI | Diminishing returns; opportunity cost grows. |
Why putting more down can be a bad idea
On the surface, putting 20% down to skip PMI looks like a free decision. The catch is the opportunity cost of the extra cash. On a $400k home, the difference between 5% and 20% down is $60,000. Those $60,000:
- Would save you about $325/month in mortgage payment ($244 P&I + $81 PMI), or roughly $3,900/year — a 6.5% return.
- But invested at a long-run market return of ~7%, would compound to roughly $230,000 over 30 years — about three times what you paid in interest savings.
For most buyers under 50, putting only enough down to qualify comfortably and investing the difference is the better long-term move. The exception: if you don’t actually invest the difference (most people don’t), the forced savings of a bigger down payment can win in practice.
Why putting more down can be a great idea
Three situations where a bigger down payment really does pay off:
- You’re self-employed or income-volatile. Lower payment = more breathing room when work slows. The lower DTI can also unlock a better rate.
- You’re buying near retirement. A small mortgage (or no mortgage) into retirement is a real quality-of-life win.
- You’re in a competitive market. Sellers favor offers with stronger financing — a 20%-down conventional offer beats a 3.5%-down FHA in a multiple-bid scenario, all else equal.
Don’t forget closing costs
Closing costs are separate from your down payment and run another 2–5% of the loan amount. On a $400k home with 20% down ($80,000), expect to bring an additional $6,400–$16,000 to the closing table. Common items: lender origination fees, appraisal, title insurance, prepaid escrow for taxes and insurance, recording fees.
Many buyers put 5–10% down specifically to keep closing-cost cash available — 0% down feels great until you discover you need $12,000 more to actually close.
How to save your down payment faster
The biggest lever is your savings rate, not your investment return. A few tactics that work:
- Automate. Direct-deposit a fixed % of every paycheck into a separate high-yield savings account labeled "Down Payment." Don’t see it, don’t spend it.
- Park it in a HYSA, not the market. If your horizon is <5 years, the volatility of stocks isn’t worth the expected return. A 4–5% HYSA is the right tool.
- Look at down-payment assistance programs. Most states and many cities run grant or forgivable-loan programs for first-time buyers, sometimes covering 3–5% of the price. Check your state housing finance agency.
- Tap retirement carefully. Roth IRA contributions (not earnings) can be withdrawn anytime tax-free. First-time buyers can also pull up to $10k from a traditional IRA without the 10% penalty (still pay tax). Use as a last resort.
Run your own numbers
Plug your real income, debts, and target down payment into our affordability calculator to see the home price you can actually afford under different scenarios. Then use the main mortgage calculator to see your full PITI breakdown including PMI.
Curious how PMI works and how to get rid of it? Read how PMI works next.