Your home may be the largest purchase you’ll ever make. And for many, saving enough for a down payment can feel like an insurmountable task. This upfront deposit, paid at closing, gives you instant equity in your home and reduces the amount of money you have to borrow with a mortgage. A down payment also minimizes your lender’s risk. After all, the more money you put down, the less the lender has to finance, and the more financial commitment you show.
Though a down payment is important for both you and your lender, you may be able to put down less than you realize. While you may think you need a 20% down payment to buy a home, that’s not the case. The median down payment in 2024 was 18%, with some buyers putting down much less. Some conventional and FHA loans require just 3% or 3.5%, and other loan types require no down payment at all.
However, there are perks to making a larger down payment. Making a down payment of at least 20% can help you avoid paying private mortgage insurance (PMI), an additional cost for home buyers. Plus, a larger down payment can result in a lower interest rate and more savings over the long term.
Regardless of the type of mortgage you get, having a smart down payment strategy can give you a smoother home-buying experience.
Key Takeaways:
- A larger down payment can result in better mortgage terms and lower long-term costs, but it may leave you cash-strapped after purchasing your home.
- Smaller down payments give buyers more financial flexibility while allowing them to take advantage of low-interest loans or down payment assistance programs.
- When planning to buy a house, develop a solid savings plan and understand the total cost, including upfront costs such as the down payment and closing expenses.
How Much Money Should I Put Down?
The amount of money you should put down on a house depends on your goals and financial circumstances.
There are plenty of benefits of making a larger down payment, but you don’t need to put 20% down. In some cases, putting down a smaller amount can be a financial advantage. However, you’ll need to consider your cash flow. A smaller down payment means you’ll have a larger monthly payment, which you need consistent cash flow to support. Beware of putting less down upfront to get into a house, only to find you can’t keep up with your monthly payments down the line.
Weigh the benefits of both a larger and smaller down paymenteach when determining how much money you should put down.
The Benefits Of A Larger Down Payment
While saving for a larger down payment may take time, it may be worth it to capitalize on the following benefits:
- Better mortgage interest rate: A larger down payment means less risk for the lender, making it more likely to offer you a lower interest rate in exchange.
- More immediate home equity: Making a larger down payment results in more immediate home equity, which is the difference between your home’s value and what you owe on your mortgage. Having more equity in your home increases your net worth, lowers your debt-to-income ratio (DTI) and gives you more financial flexibility.
- Lower monthly payment: Private mortgage insurance (PMI) is a type of insurance you’re required to take out on a conventional loan if you put less than 20% down. A down payment of at least 20% lets you skip paying PMI, resulting in a lower monthly payment.
- Lower (or fewer) fees: Some fees are applicable only when you get a loan with a low down payment (or no down payment at all). For example, FHA loans, which allow down payments as low as 3.5%, require all borrowers to pay upfront and annual mortgage insurance premiums (MIPs).
The Benefits Of A Smaller Down Payment
A smaller down payment can help you buy a home sooner or maintain a higher degree of financial flexibility when you do become a homeowner. The following are some of the biggest benefits of a smaller down payment:
- Larger emergency fund: Refusing to empty your savings to max out your down payment means you can keep a comfortable emergency cushion on hand. When an emergency strikes, you can dip into your savings rather than taking on more debt.
- Cash available for home improvements: Not every home is turnkey. There’s a good chance you’ll need to make some immediate home improvements upon buying a home, and spending less on the down payment can allow you to pay for them in cash. Not only will certain improvements make your house more comfortable, but there’s a good chance they’ll enhance the property’s value.
- Faster path to homeownership and building equity: While a smaller down payment amounts to less immediate equity, it allows you to start building it sooner. Rather than waiting until you have 20% or more saved up, you can put less down and start enjoying the perks of homeownership.
- Keep in mind that if you make a smaller down payment, you’ll have more cash upfront to put toward your house. This can be advantageous for initial repairs and updates, but don’t factor this money into the cash flow needed for your monthly payment. With a smaller down payment, you’ll have a larger monthly mortgage payment, meaning you’ll need a larger cash flow for the duration of your loan. Don’t fall into the trap of relying on upfront savings to cover your monthly payment—when those savings run out, you’ll be scrambling to cover the payments.
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Low- And No-Down-Payment Options
Government home loans, such as FHA, VA and USDA loans, as well as conventional mortgages, offer low-down-payment options for first-time home buyers. Plus, there are also down payment assistance programs to help you lower costs even more.
- FHA loans: FHA loans are popular among first-time home buyers and require just 3.5% down. Additionally, FHA loans have more lenient credit score requirements than other loan types. You can qualify with a score as low as 500.
- VA loans: VA loans are available to American service members, veterans and their families. Along with limiting your closing costs and providing financial assistance if you get into financial trouble, these loans have no down payment requirement.
- USDA loans: These loans are for low- and moderate-income households in rural or suburban areas. Like VA loans, qualifying applicants can put zero money down.
- Conventional 97 loans: Offered by Fannie Mae and Freddie Mac, conventional loans allow qualified buyers to put down as little as 3% (in other words, these loans have a maximum loan-to-value ratio of 97%, hence the name). There are also additional loan types, including Fannie Mae’s HomeReady loan and Freddie Mac’s HomePossible loan, that are designed for low-income families, offering borrower credits and flexible funding.
First-time homebuyers can explore down payment assistance programs (DPAs), such as grants or low-interest loans, to make homeownership even more accessible. These assistance programs may be available through individual states’ Housing Finance Agencies (HFAs).
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Strategies For Saving
In 2024, first-time home buyers made an average down payment of 9%. While that may not sound like much, it equates to $36,000 on a $400,000 home.
Regardless of the size of your down payment, you’ll need a solid savings strategy in order to purchase a house. Here are some savings tips to help you save for a down payment:
- Set a down payment goal and timeline: If you haven’t already, use a mortgage calculator to estimate how much you plan to spend on a house. Knowing this, you can estimate how much of a down payment you want to make. If you know when you want to buy a house, you can determine how much you need to save each month to be financially ready.
- Create a dedicated savings account: Open a separate savings account for your down payment. This helps you stay organized and focused on your goal. A high-yield savings account (HYSA) is a good place to save for a house, as it’ll earn competitive interest and keep your money highly accessible.
- Consider a certificate of a deposit: If you’re willing to forgo some flexibility, a certificate of deposit (CD) could be a good choice. CDs offer competitive fixed interest but require you to “lock up” your savings for a predetermined period of time. For example, if you open a 12-month CD, you’ll earn fixed interest on your deposit for those 12 months. But if you want to access your money during that time, you’ll likely pay a penalty.
- Reduce nonessential expenses: Cutting nonessential expenses, such as unused subscriptions and eating out, can help boost your down payment savings. Use a financial app to track and eliminate recurring subscription charges, freeing up more money to put toward your down payment.
- Use a budget: A solid budget can help you keep tabs on income, spending and savings, keeping track of your progress toward your down payment goal. There are plenty of budgeting apps to choose from, but you can also use an old-fashioned spreadsheet or pen and paper.
- Automate your savings: Don’t rely on your memory to set aside money each month. Instead, set up an automatic transfer into your down payment savings account to ensure your balance grows every single month.
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The Importance Of Smart Decision Making In Home Buying
When buying a house, understanding your budget is key. Knowing how much you can afford – including the home’s purchase price, down payment, closing costs and your monthly mortgage payment – will help you keep costs at a manageable level.
It’s also important to make sure you can afford your payments long-term, regardless of how much you put down. Any initial savings you get from making a larger down payment won’t last forever, so don’t rely on this money to make your monthly payments.
A down payment calculator, or a home affordability calculator, can help you understand how different down payment amounts affect your mortgage, monthly payments and overall costs. While it can be tempting to spend more on your home or make a bigger down payment to avoid paying private mortgage insurance, take a hard look at your budget first. The last thing you want is to empty your savings account for a house that you can’t afford to maintain.
The Bottom Line About Down Payments
While a 20% down payment is a common benchmark, you don’t need that much to purchase a house. However, smaller down payments can have consequences. For instance, if you choose to put less than 20% down on a conventional mortgage, you’ll need to pay for PMI until you reach 20% equity in your home.
The ideal down payment depends on your financial goals and personal situation. Make sure you keep some money in savings for future expenses rather than using all your funds for a down payment. And don’t forget about closing costs and ongoing expenses like maintenance, repairs and insurance. Ensuring your down payment leaves room in the budget for these major expenses can help ease your financial stress after moving into your new home.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
