What is a down payment?
A down payment on a house is the money you pay up front toward your purchase. Typically, a down payment is part of the entire purchase price and the rest is paid with a mortgage loan. The funds for a down payment can come from a variety of sources including your savings or checking account, stocks, bonds, gifts from relatives or your employer, and other sources.
Busting the 20% down payment myth
Once upon a time, putting 20% down on a home purchase was the standard. Now? It’s not. At all. Many people buy homes with as little as 5% down. Note that different types of loan have different down payment requirements.
A few benefits of a higher down payment
- You’ll have less to pay back and your monthly payments will be lower.
- You’ll spend less in interest payments.
- You’ll avoid private mortgage insurance.
- You may qualify for a lower interest rate.
A few benefits of a lower down payment
- You may be able to purchase a home sooner.
- You may be able to keep some money for renovations or repairs.
- You may be able to keep more money in your emergency fund.
What is PMI and how much does it cost?
When you put less than 20% down, the mortgage lender will likely require that you also buy private mortgage insurance (PMI). This insurance policy protects the lender in case you default on your loan.
You’ll pay it as a premium that gets added to your monthly mortgage payment. It typically costs 0.10% to 1.10% of your loan amount per year. The rates can vary between lenders and depending on factors including your credit score, the loan program, and the amount of your down payment.
If you apply for a $500,000 mortgage with a 15% down payment and you have an excellent credit score, you’ll pay about $500/year in PMI. That’s $42/month.
The good news about PMI: it’s (usually) not forever!
When homebuyers hear about PMI, they often balk at the concept of an extra payment. However, PMI can be well worth it. The benefits of putting down less money up front may outweigh the hardship of paying more per month. Some people even choose to put less down and pay PMI when they could afford to pay 20% down, just to keep more money for other expenses.
Plus, PMI isn’t a forever payment for conforming mortgage loans, the most common type of mortgage loan. You’ll stop paying PMI automatically when your loan balance reaches 78% of your home’s purchase price (or the appraised value of your home, if it’s lower). You can also request to drop PMI when your balance reaches 80%. After two or more years of owning the home, if you believe the home has gained enough value that you know have at least 25% equity in the home, you can request a new home appraisal, which may result in your PMI being dropped.
How much is a typical down payment?
Now you know that 20% down is no longer the norm. But what is?
According to the 2021 National Association of REALTORS Home Buyers and Sellers Generational Trends Report, a 12% down payment is currently the national median. Younger buyers fall below the median.
|Age group||Down payment (median)|
|22 to 30||6%|
|31 to 40||10%|
|41 to 55||13%|
|56 to 65||18%|
|66 to 74||23%|
|75 to 95||21%|
Understanding the facts about how much of a down payment is required may allow you to adjust your expectations about homebuying. Maybe you’re more ready to buy a home than you thought!