Published April 28, 2021
What You’ll Learn
What factors go into determining an ideal down payment
How your upfront costs can impact long-term savings
Why 20% down payment minimums are a thing of the past
How much should you put down on a house?
Unless you're part of the 25% or so of homebuyers who elect to put in an all-cash offer, you'll likely need a mortgage (and a down payment) to buy a home. A down payment is the amount of money you pay upfront to buy your home, with the remaining balance (known as the principal) funded through a lender.
Down payments are expressed as a percentage of the total purchase price, and 20% is often touted as the must-have amount for any prospective homebuyer. While this was the benchmark once upon a time, these days there are more flexible funding options available—it’s no longer a “one-size-fits-all” scenario when it comes to down payments. Instead, it’s about finding the amount that works best for your homebuying budget. Here’s what you should keep in mind when deciding how much to put down on a house:
Mortgage down payment requirements
While a 20% down payment comes with some clutch benefits (namely, you can avoid paying private mortgage insurance, or PMI), different types of loans offer different down payment options ranging between 3–20%. Conventional mortgages typically require down payments between 5–15%, FHA loans are backed by the government and require as little as 3.5% down payment, and others—VA and USDA loans, for example—require no down payment at all! Especially for first-time homebuyers, loans with smaller down payments may be more financially palatable.
However you’re funding your down payment—savings, assets, a cash gift from generous relativesnever hurts—deciding how much you can spend upfront is pivotal to the purchase process. You can’t really start making offers until you have that number set and pre-approved with your lender. In the days after you make an offer on a home, you should be ready to part with some of this payment. An earnest money deposit, also referred to as a good faith deposit, is usually paid during this time to signal your commitment as a buyer and typically equates to 1%–2% of the purchase price. At the closing table, your earnest money deposit will be put toward the down payment. This is also when you’ll pay the remainder of the down payment and any other closing costs.
What is the average down payment on a house?
A typical down payment in 2020 was just 12%. But the exact number that’s right for you is determined by your financial profile, your budget, and your homebuying goals. As the biggest upfront cost of buying a house, your down payment impacts the affordability of your loan, your monthly payment amount, and your interest rate.
As a general rule, a bigger down payment comes with some key benefits. Spending more on your down payment means you pay less in interest, either because you qualify for a lower rate or simply because the principal amount that’s used to calculate your interest payments will be smaller. It can also give you a competitive edge as a buyer and borrower—larger down payments signal savings and financial stability to lenders, which can equate to less risk; on top of that, offering more money upfront reassures sellers that you have plenty of cash to cover closing costs and other expenses associated with the purchase of a home.
How lenders see your down payment
Credit, income, assets, and debt. Lenders look at all these factors to figure out how much money they might be willing to lend you. The size of your down payment will impact the loan terms a lender offers you, particularly your interest rate. For example, your lender might require that you make a higher down payment to offset a lower credit score. Conversely, if you don’t have much money saved or just don’t want to lay out a bunch of cash upfront, a strong credit score might help qualify you for a smaller down payment.
Your down payment helps determine your loan-to-value (LTV) ratio, which is a measure that lenders use to assess the risk of a mortgage. To calculate the LTV of a particular loan, just divide the amount of money you borrow by the appraised value of the property. Let’s say you’re buying a $300K house with a 10% down payment of $30K. Divide the loan amount ($270K) by the value of the home ($300K) to get an LTV of 90%. The more money you have to invest upfront, the higher your equity or “ownership” in the home will be from the get-go. A lower LTV means reduced risk for lenders, and typically qualifies your loan for more competitive interest rates which can reduce the monthly cost of your mortgage.
How to calculate down payment on a house
Maybe it goes without saying, but you shouldn't plan to drain your entire savings account on a down payment. Not only are there other upfront costs associated with buying a home (closing costs can be 2–5% of the loan amount), but you also need to consider the other financial obligations in your life. So how much should you plan to spend upfront? The type of loan you choose, your cash savings, as well as your pre-approval will indicate ballpark figures for your ideal down payment amount. Beyond that, here are the most important factors to consider:
Short-term affordability
Putting more money down upfront has its appeal, but overextending on a big down payment isn’t the right call if it’s going to create unmanageable financial strain in the here and now. Be sure you’re budgeting for other expenses in the homebuying process like closing costs, fees, and moving expenses; beyond that, consider how other upcoming costs—travel, a new car, starting a family, saving for retirement—might factor into your down payment decision.
Monthly mortgage payments
Your down payment is a one-time, upfront cost, but it will have a recurring impact on your mortgage for years to come. It’s important to consider the long-term feasibility of that monthly cost when choosing your down payment amount. Once you know how much house you can afford and the types of loans available to you, you’ll be able to see how increasing or decreasing the size of your down payment amount can impact the monthly cost of your mortgage.
Interest rates
Along with homeowner’s insurance and property taxes, your loan principal and interest rate are primary factors in determining the affordability of your monthly mortgage payment. Putting more money toward your down payment can qualify you for better interest rates, which can equate to significant savings over the life of your loan. Just make sure you’re looking at the impact of these savings in the long-run and comparing them to short-term costs.
In addition to paying more in interest over time and making higher monthly payments on the principal/interest, the loan with the smaller down payment is subject to recurring PMI fees until the LTV ratio dips below 80%. You’ll save more over the life of the loan with a bigger down payment. On the other hand, saying goodbye to $60,000 in one fell swoop might make it difficult to sock money away for other important financial obligations like retirement savings or to deal with unexpected emergencies such as losing a job.
You might decide that you’re comfortable with the higher monthly amount, and that more expensive interest costs/PMI fees are worth it for the chance to buy a house and start building equity. However, if you can only afford to spend 30K on your down payment (or some other set amount) and you want to reduce the cost of your loan, it might be worthwhile to look at less expensive houses where your upfront investment will equate to a larger percentage of the purchase price. (A $30,000 down payment goes a lot farther on a house listed for $220K than for $300K.) Either way, the right down payment will make it possible to manage monthly costs without taking on unreasonable financial risks.
