When you buy a home, a higher down payment can land you better terms on your mortgage. A 20% down payment is considered the golden standard, but this is out of reach for many home buyers — and 20% down isn’t mandatory. Many lenders accept 5% down or less. Let’s look at how long it could take you to save for a 20% versus 5% down payment, depending on where you live.
Many experts recommend that home buyers save at least 20% down, as it helps them avoid paying for private mortgage insurance. PMI is a fee typically added to your monthly mortgage payment if you take out a conventional loan with less than a 20% down payment.
A smaller down payment is riskier for the lender, so they charge PMI to protect themselves. It serves as an insurance policy that protects the lender in the event the borrower defaults on their mortgage.
Several factors can influence the amount of PMI you pay, including your loan amount, loan type, credit score, and the size of your down payment. Broadly speaking, it could range from 0.20% to 2% of the original loan amount annually.
For example, if your PMI costs 0.3%, and you take out a $400,000 mortgage, you would pay $1,200 annually, or $100 per month.
“For larger loans, with a low down payment and less-than-perfect credit, PMI can be several hundred dollars a month, so avoiding it can be crucial for some borrowers,” Darren Tooley, senior loan officer at Cornerstone Financial Services, said via email. “However, for borrowers with great credit and lower debt-to-income ratios, the amount of the monthly PMI is often much less than people expect it to be.”
PMI on conventional loans doesn’t last forever. You can request a cancellation once you reach 20% equity in your home. Otherwise, the lender is required to remove PMI from your mortgage once the outstanding loan balance reaches 78% of the property’s original value.
Yes, a 20% down payment helps you avoid PMI. However, paying this much up front isn’t always easy, especially since housing prices have remained elevated since the COVID-19 pandemic began.
A recent U.S. Mortgage Insurers analysis ran the numbers for how long it would take the typical American to save for a 20% down payment versus a 5% down payment — and the company even factored estimated closing costs into its study.
The largest discrepancies are in Washington, D.C., and Hawaii, where the difference between saving for a 20% versus 5% down payment is 33 years. California isn’t far behind at 32 years.
Iowa has the smallest difference, which is still a whopping 10 years.
At first, the benefits seem undeniable. Beyond avoiding PMI, you pay less in total interest and have a better chance of qualifying for lower mortgage rates with a 20% down payment.
Still, this goal may not make the most sense for everyone — particularly if it takes decades to achieve. Tooley said that if a borrower can qualify for a mortgage and afford a home with a lower down payment, it rarely makes sense to wait to buy a house until you have 20% down.
“In many cases where a borrower waits to buy a home to save the 20% down payment, the amount they would end up paying monthly would be just as much or higher than if they had [purchased] the home from the beginning and paid PMI,” said Tooley. “In cases where a borrower waited until they had the 20% down to avoid paying PMI and it did end up saving them on their monthly payment … the amount of lost equity would be far greater than their monthly savings by avoiding PMI.”
Most home buyers aren’t dishing out 20%. For example, the typical down payment for first-time home buyers in 2024 was only 9%, according to the National Association of Realtors®.
Here are your options if you’re looking for a smaller down payment.
Conventional loans: The Fannie Mae HomeReady and Freddie Mac Home Possible programs require as little as 3% down for borrowers with low to moderate incomes. Both institutions also offer programs that allow first-time home buyers to put down just 3%. Otherwise, many mortgage lenders allow a down payment as low as 5% on conventional mortgages.
FHA loans: The Federal Housing Administration allows borrowers with a credit score of at least 580 to put down 3.5%. If your score is between 500 and 579, you’ll need a 10% down payment.
USDA loans and VA loans: Loans backed by the United States Department of Agriculture and the Department of Veterans Affairs don’t require a down payment.
Down payment assistance: The U.S. Department of Housing and Urban Development, along with state and local agencies, offers down payment and closing cost assistance in the form of grants, forgivable loans, and subsidized housing. Check the National Council of State Housing Agencies to find a local partner. Many mortgage lenders also offer assistance.
1%-down-payment programs: There are lenders that let you put just 1% down when taking out a conventional loan, and the company covers the remaining 2%. There are popular mortgage lenders, such as Rocket Mortgage, offering 1%-down programs.
No, most mortgage lenders don’t require 20% down. Several types of mortgage loans accept down payments ranging from 0% to 5%. However, you must pay mortgage insurance if you put down less than 20% on a conventional loan, and this amount is typically added to your monthly mortgage payment.
The minimum down payment requirement varies by lender and type of mortgage. Conventional loans can require as little as 3% down, but may be reserved for first-time home buyers or those with a limited income. Government-backed programs, such as FHA loans, also have more lenient requirements. The USDA and VA offer zero-down mortgages.
The amount of PMI is based on your loan, credit score, and down payment, among other factors. It can range from 0.20% to 2% of the loan value annually.
Laura Grace Tarpley edited this article.
