Pros and Cons of Putting 20 Percent Down on a Home  

If you are in the market for a house, you have probably heard that you need a 20 percent down payment. Let’s go over the pros and cons of putting 20 percent down on a home.With today’s home prices, that amount of money can take a long time to save.

So, do you have to have a large down payment? More importantly, should you put 20 percent down? Below, we take a look at the benefits and drawbacks of a 20 percent down payment and consider some alternatives that might be more manageable for you and your circumstances.

How Do Down Payments Work?

A down payment is the portion of the home’s price that you pay up front. For example, if you purchase a home for $500,000, a 20 percent down payment would be $100,000, which you would pay on the day the deal for your house closes. That would leave you with a mortgage of $400,000.

Benefits of a 20% Down Payment

Although saving for a down payment this large can be a challenge, there is more than one benefit to putting 20 down on a home.

Improving Your Borrower Profile

Having a 20 percent down payment makes you more attractive to lenders, meaning that it will be easier for you to get a mortgage loan. A large down payment signals to lenders that you are financially stable and responsible, decreasing the risk for them.

Lower Mortgage Rates

Lenders often give lower mortgage rates to borrowers who put 20 percent down on a home. Because it lowers their risk, they can be more flexible with the terms of the loan.

Instant Equity

The larger the down payment, the more equity you have in your home right away. That gives you immediate pride of ownership, and you can use that equity as collateral for additional borrowing if you need it.

Avoiding Private Mortgage Insurance (PMI)

A key benefit of putting 20% down on a home is that you do not have to get private mortgage insurance (PMI). This insurance is required by mortgage lenders if you have a smaller down payment and is intended to protect them if you default on your payments. PMI can add 0.5% to 1% of the loan amount annually to your mortgage payments.

Lower Monthly Payments

A larger down payment reduces the size of your mortgage loan right from the start, and that means that your payments will be lower. Here is an example of how that might work with a home that costs $500,000, using a 5% down payment, a 10% one, and a 20% one, assuming a 6.5% mortgage rate and a 30-year amortization:

Less Interest

With a 20 percent down payment, you pay less interest over the course of the loan. Here is an example of how much you could save with a larger down payment on a $500,000 home, based on a 6.5% mortgage rate and a 30-year amortization:

Shorter Amortization

With 20 percent down, your mortgage payments would be lower, but you could also go with higher payments and pay your home off faster. Here is an example, using a $500,000 home, a 6.5% mortgage rate and a $3000 monthly mortgage payment:

Drawbacks of a 20% Down Payment

Despite the benefits, putting 20% down on a home has some drawbacks:

Delayed Homeownership

While you are saving for a larger down payment, you could be renting or living in someone else’s house instead of building equity in your own home. In the meantime, house prices will likely rise, and interest rates could be higher.

Depleted Savings

Home ownership is not the only thing people save for; using a significant portion of your savings for a down payment may leave you short for emergencies, unexpected periods of unemployment, and monthly homeowner expenses.

Missed Investment Opportunities

If you put 20% down on a home, you are investing in a great real estate asset, but you are also passing up other opportunities to make a return on that money. Needless to say, no investment is guaranteed, and each homeowner needs to weigh the pros and cons of each investment relative to other options.

Alternatives to a 20% Down Payment

If you are still wondering “do I have to put 20 down on a home,” you may be interested in these alternatives:

FHA Loans

These loans are backed by the Federal Housing Administration and allow for down payments as low as 3.5%.​ There are some additional costs with FHA loans, but they do allow you to get into the housing market faster. FHA loans are a great option for low- to middle-income borrowers with a scant or spotty credit history.

VA Loans

VA loans are available to veterans, active-duty service members, and surviving spouses. These loans often require no down payment and are a great opportunity for current and former military members to become homeowners.

USDA Loans

Designed for rural and suburban homebuyers, USDA loans are available with no money down. Similar to FHA loans, they do have some extra costs, but they can make homeownership more accessible to many.

A 20% Down Payment

Do you have to put 20 down on a house? Not necessarily. Although a 20% down payment offers numerous advantages, it is not the only path to homeownership. Assess your financial situation, explore available loan programs, and consult with a mortgage advisor or a REMAX real estate agent to determine the best strategy for you.