To buy our first home, my husband and I saved diligently for about two years, which led to a down payment of about 5%—far less than the 20% amount I always heard you “needed” to have. But for us, 20% wasn’t realistic, due to a mix of heavy-hitting student loans, daycare costs for our toddler and a desire to have access to extra cash flow. However, the more I talked to people who had recently purchased a house, the more I realized smaller down payments actually seemed to be fairly common.
According to a study by the National Association of Realtors, the median down payment for first-time buyers has actually held steady at 6% for the past few years. It makes sense, to some degree: a smaller down payment makes it more possible for people to buy in the first place, keep some savings on hand, and invest in preferred upgrades. At the same time, a large down payment remains fairly attractive to buyers, lenders and sellers due to lower interest rates, lack of mortgage insurance, more affordable monthly payments, and reduced risk. I asked three first-time homeowners in their early thirties to share the reasoning behind their decisions to put down 5%, 10%, and 20%, respectively. Here’s what I learned, and how it can help you decide which financial path to take.
Down payment: 5%
Steph D., a marketing specialist in Illinois, intentionally put down 5% on her first home with her husband as a way to retain their savings. “We had been passively saving for 4-5 years, although we also paid for a wedding during that time as well,” she explains. “We also purchased our home in a sellers’ market, so when the appliances were written in as is, it was a situation we had to accept in order to own a home we loved. Between the knowledge that we would have to immediately replace several major appliances as well as furnish a home two times larger than our last place, maintaining our savings was more important than avoiding monthly private mortgage insurance (PMI) costs.”
She also wanted to maintain a safety net of a year’s income, plus additional emergency funds, and avoid financial risk. “Instead of staying up at night stressing over what we were spending to move into our dream place, we were able to comfortably purchase furniture and appliances that made our new house our home,” she says.
“When interest rates are as low as they are, sometimes it makes more sense to put less money down,” explains Sara Hopkins, a realtor based in Des Moines. She often recommends that buyers save their down payment and invest it elsewhere, particularly since it’s now possible to put 3% or 5% down through a conventional mortgage without using Federal Housing Administration (FHA) loans.
Michael Nicholas, director of U.S. Mortgage Sales and Service at BMO Harris Bank, suggests reviewing the state of your savings—what you have at the time of purchasing a home, and how much you’ll need afterward—as a key decision point regarding down payments. “Some buyers may never be in a position to put down 20%,” he says. “So, in order to realize the dream of homeownership and start building on what will one day probably be your largest asset, a lower down payment may be your only option. And we all need to have an emergency fund in case the unexpected happens; very few people move into a house and leave it exactly as-is. Having money left over after your purchase is important—if that means putting a little less down, so be it.”
Down payment: 10%
Iowa-based entrepreneur Richard Dedor and his husband put down between $20,000-25,000, which was right around 10% of their home cost, in order to position their mortgage payment in a certain financial range. “We basically saved as much as we could, as we knew what we needed our monthly mortgage payment to be in the end,” he says. “Using our down payment and the max we could afford on a mortgage helped us know how much we could spend on the actual house.”
Nicholas says this is relatively common since the amount of your down payment obviously impacts your monthly payment. Whatever is left on your mortgage impacts that cost, and the rest depends on the overall lifespan of your mortgage, your interest rate, whether or not you escrow for taxes and/or insurance, and what types of insurance you may want or need.
“When you have more invested in your home, you are less likely to want to use it, and this lowered risk to the lender leads to a better rate for you,” says mortgage banker Corey Vandenberg. “And the more you put down, the less mortgage insurance you could be paying, either as an amount or in the length of time you are paying it. Depending on the lender and your credit, it can open a whole new range of loan products for you—more money down opens current and future doors to tap your equity. Since a home equity loan or line of credit is based on equity, it would be nice to have that as soon as possible for a host of reasons, including to do improvements to the home.”
Down payment: 20%
In 2012, Rose C. quit her job to travel around the world for two years and ended up making a fairly steady income overseas without incurring the usual consumer costs of living in the states. She considers herself a hard worker who lives simply and is “kinda crazy” about saving money, and as a result, she was able to put 20% down on her first home this year. “I decided to put 20% down because I don’t see a point of paying PMI and extra interest, plus, it wouldn’t totally wipe my savings out,” she says. “One thing that helped me is having no debt, and now, my goal is to get my home paid off ASAP.”
According to Nicholas, if you can comfortably put down 20%, you won’t need PMI, which will save you money and lower your monthly mortgage payment. It also places you in a position of strength as a buyer, since both sellers and lenders prefer the security of larger down payments and might favor your bid in a competitive market.
“In the end, you have to be comfortable with the amount of down payment you make on your home and what it leaves you with after all is said and done,” says Nicholas. “You don’t want to be house-rich and cash-poor—feeling comfortable and confident with the decision you make is the most important factor of all.”