Before making a 20 percent mortgage down payment, read this

Tim Lucas
The Mortgage Reports editor

Should I put 20% down?

You hear it almost every time you read a news article about home buying.

“You should put 20% down on a home.”

But don’t let the opinions of so-called experts persuade you. It could actually be a very, very bad idea to put 20% down.

Why? Because it puts the home buyer at risk.

Sure, it’s safer for the lender if you make a large down payment. But your main concern should be you, not the lender.

Here’s why you should think twice before dumping your life savings into a down payment on a house.

Verify your low down payment loan eligibility (Dec 9th, 2018)

How much should you put down on a house?

So, the question most home buyers face right away is, “Should I make a large down payment?”

It’s becoming more popular not to make a large down payment, for several reasons, discussed below.

To summarize, though, you put yourself at risk when you make a large down payment. If you experience a loss of income or another financial emergency, you lose the home along with that large down payment.

You shift more risk on the lender when you make a small down payment.

And, as the charts below show, you don’t save a ton of money each month by putting a lot down.

Comparison of down payment and monthly payment per loan program (FHA, VA, USDA, Conv 97, 5% down, 10% down)

Making a $75,000 down payment on a $300,000 home, you only save $500 per month compared to a zero-down loan.

Still convinced you should make a large down payment? Keep reading.

What is a down payment?

A down payment is the amount of cash you put toward the purchase of a home.

It may be expressed as a percentage. For instance, it usually takes a 20 percent down payment to buy a home without private mortgage insurance. It may also be expressed as a dollar amount. As in, you have $15,000 available for a down payment.

Loan programs today allow you to choose almost any down payment you would like –there are even zero down payment mortgages.

Low down payments don’t mean likelihood of default

VA loans require zero down, yet have one of the lowest default rates of any loan type.

In addition, the lower default rates among those who can meet higher down payment requirements may have little to do with the “skin in the game” argument.

Homebuyers who can make a massive upfront investment tend to be more financially stable and established in their careers.

10 things to know about 100 percent VA home loans

High down payment requirements may have nothing to do with the fact that they did not default.

So, while you might hear that it’s more “conservative” to make a large down payment, it’s only partly true: it’s more conservative for the lending institution.

A large down payment is actually riskier for the home buyer.

Verify your eligibility for a low down payment loan (Dec 9th, 2018)

Should you make a larger down payment?

How much should you put down on a house? As much as possible?

There’s nothing wrong with that, as long as you’re not also carrying high-interest debt. You might be better off zeroing those balances first. You also don’t want to sacrifice retirement funds or your emergency account.

Those who pay more upfront, without depleting all their assets, probably should. It saves on mortgage insurance, for one thing.

3 reasons to pay off your mortgage early (and 2 not to)

A large down payment helps you afford more house with the same payment. In the example below, the buyer wants to spend no more than $1,000 a month for principal, interest, and mortgage insurance (when required).

Here’s how much house this homebuyer can purchase at a 4 percent mortgage rate. The home price varies with the amount the buyer puts down.

Percent down Dollar amount Principal & interest/MI combo Home price
3% $4,635 $884/$116 $154,500
5% $8,775 $896/$104 $175,500
10% $19,310 $913/87 $193,000
20% $52,365 $1,000/$0 $261,500

Even though a large down payment can help you afford more, by no means should home buyers use their last dollar to stretch their down payment level. It’s not conservative at all, for the following three reasons.

3 good reasons for putting less money down on a home

Just because you can put more money down on your home purchase doesn’t mean you should. 

1. You can’t get your down payment back (easily)

The whole point of a down payment is to tie up money in the house.

With that money unreachable, lenders say, the homeowner will continue to make their payments.

That’s not necessarily a bad thing. The money is “sitting there” for when you sell the house someday.

However, a financial event can leave you wishing you had access to the money without selling. Say you lose a job for three months. An extra $20,000 would be a nice safety cushion.

Best ways to use your cash-out refinance

And, if you lose your source of income, you can’t take home equity out via a cash-out refinance or home equity line of credit (HELOC). Lenders won’t approve a new loan to someone between jobs.

In short, the more you need to get at the money, the less access you have to it.

Ask an expert about down payment eligibility

2. You’re at risk if the home value drops

A down payment protects the bank, not the home buyer.

Home values are tied to the U.S. economy. Most of the time, the economy is making incremental gains, and home prices rise.

But sometimes, the economy falters. This usually happens after extended periods of too-hot growth. That happened in the late 2000s.

In this situation, consider two home buyers:

  • Buyer A: Puts 20 percent down on a $300,000 home
  • Buyer B: Uses FHA to put 3.5 percent down on a $300,000 home

Buyer A, thinking he is being “conservative” puts $60,000 down on a home. Buyer B puts down just $10,500.

How much do extra mortgage payments really save you?

If home values fall 20 percent neither Buyer A nor Buyer B have any equity in their homes. However, Buyer A lost a much bigger amount.

Plus, Buyer B carries less risk of being foreclosed on if she can no longer make her payments. This is because banks know they will take a bigger loss repossessing a home with a larger outstanding loan balance.

So, really, which home buyer is more conservative? The one who puts the least amount down.

Verify your eligibility for a low down payment loan (Dec 9th, 2018)

3. A down payment will lower your rate of return

Even if you’re a conservative investor, if you want to maximize your return on investment, you’ll monitor your down payment size.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Your down payment size has no bearing on the rate your home appreciates.  In this example, your home is worth $20,000 more.

Investment property and mortgage rates: how much more will you pay?

That down payment affected your rate of return.

  • With 20 percent down on the home — $80,000 –your rate of return is 25 percent
  • With 3 percent down on the home — $12,000 — your rate of return is 167 percent!

Don’t forget mortgage insurance…

However, we must also consider the higher mortgage rate, plus mandatory private mortgage insurance which accompanies a conventional 97 percent loan. Low down payment loans can cost more each month.

Avoiding mortgage insurance is costing you $13,000 a year

Assuming a 175 basis point (1.75 percent) bump from rate and PMI combined, then, and ignoring the homeowner’s tax-deductibility, we find that a low down payment homeowner pays an extra $6,780 per year.

Even though it doesn’t matter

With three percent down, and making adjustment for rate and PMI, the rate of return on a low-down-payment loan is still 106 percent — much higher than if you made a large down payment.

The less you put down, then, the larger your potential return on investment.

Use a HELOC to increase liquidity

If you’ve already made a large down payment, you can still decrease your risk with a home equity line of credit.

Do it while the economy is doing well, lenders are offering HELOCs, and you have a job. If any of these factors evaporate, access to your home’s equity is extremely limited.

You can open a zero-balance line of credit. You pay nothing in interest until the moment you draw funds from it. It’s just like a credit card (with much lower rates of interest).

What’s better for you? Home equity loan or HELOC?

For instance, you open a HELOC with a $100,000 limit. You draw nothing. In an emergency, you draw $5,000 per month or as needed, until you’re back on your feet.

It’s a convenient, low-cost way of turning your home’s equity into potential cash.

And if your home value drops or you lose your job, you can still take cash out. The terms of the HELOC don’t change based on home value or employment status.

A zero-balance HELOC is probably the easiest way to build a financial cushion quickly if you’ve tapped most of your liquid assets to make a large down payment.

What is my eligibility for a low down payment home loan?

When you’re planning for a down payment, there are additional considerations beyond “how much can I afford to put down”. Consider your down payment in the context of your tolerance for investment risk, as well.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Verify your eligibility for a low down payment loan (Dec 9th, 2018)



This calculator will help you determine what down payment amount makes sense for you and your family.
USDA mortgage

The USDA loan is the best-kept secret in the mortgage market. It requires zero down, plus credit guidelines are loose. Eligibility is location-based. Many rural and suburban neighborhoods across the U.S. are USDA-eligible. This loan is perfectly suited for first-time and repeat buyers, and you don’t have to have a high income to qualify.

Check your USDA eligibility now
VA home loan

The VA home loan is available to home buyers with eligible military experience -- as little as 90 days of service in some cases. This mortgage option has no down payment requirement. Plus, no mortgage insurance is required, potentially saving buyers hundreds per month.

Check your VA loan eligibility status now