How Much Should My Down Payment Be?
Compare different down payment options, understand how each affects your monthly costs, and decide whether waiting to save 20% is truly worth it.
The 20% Rule and Why People Say It
The advice to put 20% down on a home comes from two practical benefits. First, it eliminates private mortgage insurance, which adds $100 to $300 per month or more to your payment. Second, it means you start with meaningful equity in the home, which provides a cushion if property values dip and protects you from being underwater on your loan.
Twenty percent also typically qualifies buyers for better interest rates and makes them more attractive to sellers in competitive markets, because a larger down payment signals financial strength and reduces the chance of the deal falling apart due to financing issues.
That said, 20% has become increasingly difficult for first-time buyers in many markets. On a $400,000 home, 20% is $80,000. Saving that amount while also paying rent, managing student loans, and handling everyday expenses takes many people a decade or more. The 20% rule is good advice when achievable, but it is not the only path to homeownership.
The Real Minimum Down Payment Options
Conventional loans backed by Fannie Mae and Freddie Mac allow down payments as low as 3% for first-time buyers and 5% for repeat buyers. FHA loans, backed by the federal government, require as little as 3.5% down with a credit score of 580 or higher. VA loans for eligible military service members and USDA loans for rural properties can both require zero down payment.
Each low-down-payment option comes with trade-offs. Conventional loans with under 20% down require PMI. FHA loans require a mortgage insurance premium, or MIP, for the life of the loan if your down payment is under 10%. VA and USDA loans have their own funding fees but avoid the ongoing mortgage insurance costs.
State and local first-time buyer programs also offer down payment assistance grants and low-interest second loans. A housing counselor approved by HUD can help you identify programs available in your area. These programs do not always appear in standard mortgage searches, so asking specifically about assistance programs is worth the time.
How Down Payment Affects Your Monthly Payment
A larger down payment reduces your loan balance, which lowers your principal and interest payment. It also eliminates or reduces PMI. The combined effect can be significant. On a $350,000 home at 7% interest over 30 years, putting 5% down ($17,500) versus 20% down ($70,000) results in a loan of $332,500 versus $280,000.
The principal and interest on the 5% scenario is about $2,213 per month plus roughly $200 in PMI, totaling around $2,413. The 20% scenario carries a principal and interest payment of about $1,863 with no PMI. The difference is roughly $550 per month.
Over five years, that gap totals $33,000 in extra monthly costs. However, in the 5% scenario, you also kept $52,500 more in cash at the time of purchase. Whether keeping that cash and investing it would outperform the cost of the higher payment depends on investment returns, mortgage rates, and how long you hold the home.
Saving for a Down Payment vs Investing the Difference
If you have money you could put toward a larger down payment but are considering investing instead, the math depends on your mortgage interest rate versus your expected investment return. If your mortgage costs 7% in interest and the stock market averages 7% to 10% over long periods, the decision is genuinely close and depends on tax implications and risk tolerance.
A stronger argument for saving a larger down payment is risk management. A bigger down payment means smaller mortgage payments, which are a fixed obligation. Investment returns are not guaranteed. If the market drops sharply during an economic downturn that also threatens your job, high fixed mortgage payments become a real problem.
The practical answer for most people is to hit a comfortable down payment threshold — enough to qualify for good rates and manage PMI — and then direct additional savings toward retirement and emergency funds. Optimizing the down payment to the exact last dollar is less important than having a sustainable plan that leaves room for the unexpected.