How to Pick the Right Down Payment Strategy: 20% vs Lower Options

A popular cliché is that you must or should put 20% down when buying a home. Surprisingly, that's not the case at all! Even if your financial situation allows you to put 20% down, it may make more financial sense to put down a lot less. But how do you know what the right decision is? We'll break down the myth and the math and help you be in control of the right choice for you.

Minimum down payments

Mortgage programs in the U.S. are designed to make homeownership accessible. There are many programs that offer as little as 3% down or even 0% down in certain cases. Here's a breakdown of the different types of mortgages and what the minimum down payment requirements are:

• Conventional Loans – 3% for first-time home buyers and 5% for non-first-time home buyers.

• FHA Loans – 3.5% with a credit score of 580 or above, and 10% if your credit score falls below this threshold.

• VA Loans – 0% – Only eligible for Veterans.

• USDA Loans – 0% – Only eligible in rural areas. Income limits apply.

Note – these low down payment options only apply to your primary residence. Mortgage lenders will likely require much higher down payments for second homes and investment properties.

Where the 20% down payment myth came from

Many decades ago, it wasn't a myth at all; mortgage lenders actually did require 20% down payments. This served as a protection mechanism for mortgage lenders. It forced people to have "skin in the game" and benefited the lender in cases of foreclosure. For instance, let's say the homeowner stopped paying their mortgage, and the lender had to foreclose on the property. The lender would be left with legal fees and realtor commissions to take the property back and get it sold. By having a loan of no more than 80%, the lender could cover all of those legal and selling fees and even have the flexibility to discount the selling price of the home to sell it quickly without losing any money.

That all changed after the 1950s, when banks realized they could make a lot more mortgages – and a lot more money – if the barriers to home ownership were lessened. That's when we began to see more programs offering low down payment options. However, this wasn't without its challenges. Banks realized they were taking on more risk by lending more money. There was a much higher chance that if something went wrong, the banks stood to lose a lot more. To offset that risk, mortgage insurance was created.

What is mortgage insurance?

Mortgage insurance serves as protection for your mortgage lender. It does not protect you. If someone stopped making mortgage payments and their mortgage went into default, mortgage insurance would kick in and cover a portion of the lender's loss. If mortgage insurance is required, the mortgage insurance premium is automatically added to your monthly loan payment by your lender, so you won't have a choice in the matter.

With conventional mortgages, mortgage insurance (also known as Private Mortgage Insurance or PMI) is required when the down payment is less than 20%, but it can also be removed once you reach 20% equity. The cost typically ranges from 0.3% to 1.5% annually based on the loan amount.

If you get an FHA loan, mortgage insurance (also known as MIP or Mortgage Insurance Premium) is always required regardless of down payment, but if you put 10% or more down it can be removed after 10 years. This usually ranges from 0.50% to 0.55% annually based on the loan amount plus an upfront fee of 1.75%.

The math

The next big question is what down payment is right for your financial situation? Let's break down how the costs actually look over time.

Say you're buying a house for $300,000 and plan to live there for 10 years — roughly the average amount of time someone owns or refinances their home. You're a first-time homebuyer without 20% down, and you expect mortgage insurance to run about 0.50% annually. Across down payment amounts ranging from 3% to 20%, the total amount paid over that 10-year period doesn't change dramatically. The tradeoff is straightforward: more upfront means a lower monthly payment, less upfront means a little more each month — but the overall cost tends to even out.

The calculation shifts if you're not planning to stay that long. Take the same scenario, but assume this is a starter home and you're planning to move up in 5 years. In that case, the less you put down, the less you'll pay over that shorter window. Even if you had 20% available, you might be better off investing it in a way that fits your risk profile — like a High Yield Savings Account, a Certificate of Deposit, 401(k), or IRA.

Making the final decision

A lot can change in a couple of years, and your "starter home" probably isn't your "forever home". So if you've ever held yourself back from buying a home because you felt like you didn't have enough saved, I hope you've learned not to let the down payment scare you. A smaller down payment can help you pay less overall in the short run, but eventually, in the long run, it all evens out. Time matters.

No two financial situations look the same, and that's exactly the point. That's why we've created this calculator for you to plug different scenarios in and see how the numbers change. Ultimately, the right decision for you is the one that you are most comfortable with.