According to the National Association of Realtors, the median home price nationwide for the year ending June 2016 was $227,700. A 20% down payment on this median-priced home would be $45,540; a 10% down payment would be $22,700; a 5% down payment would be $11,385; and a 3.5% down payment would be $7,960.
The Consumer Financial Protection Bureau lists these three benefits for plunking down at least 20%:
- You’ll have a smaller loan—which means lower monthly payments. With a larger down payment, you borrow less, so you have less to pay off. That means your monthly payments will be lower than with a smaller down payment.
2. You’ll have lower overall costs. When you borrow less, you’ll pay less interest on your loan. That’s because the interest is calculated using a lower loan amount. When you put down at least 20 percent, you also typically won’t have to pay for mortgage insurance. Mortgage insurance increases your monthly mortgage payment.
3. You start out with more equity, which protects you if the value of your home goes down. When you make a larger down payment, you have more of a cushion in case home prices decline. With a smaller down payment, you have a higher risk of owing more than your home is worth if market home prices decline, like they did between 2008 and 2012. If you owe more than your home is worth, it can be very hard to sell or refinance your home.
The “20 percent” threshold is based on guidelines set by Fannie Mae and Freddie Mac, government-sponsored companies that guarantee most of the mortgages made in the U.S. To qualify for a Fannie Mae or Freddie Mac guarantee, a mortgage borrower must either make a down payment of at least 20 percent, or pay for mortgage insurance. That’s because mortgages with down payments less than 20 percent are considered more risky for the lender.
Not all mortgages are guaranteed by Fannie Mae or Freddie Mac. Low down payment mortgages are offered through other government guarantee programs, such as the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and Department of Veterans Affairs (VA). Those programs also require mortgage insurance or other fees. Some lenders may offer their own low down payment mortgage programs that do not require mortgage insurance or participate in any government guarantee program. Those loans typically charge higher interest rates in order to compensate for the lack of mortgage insurance and guarantee.
No matter what kind of loan you choose, if you put down less than 20 percent, you can expect to pay more for your mortgage than if you put down at least 20 percent.