When you start saving to buy a home, the first question on your mind might be how much you should set aside for a down payment. The size of your down payment—or the amount of money you pay upfront when buying a house—will impact the amount of money you need to borrow from a lender, your monthly mortgage payment, and whether you need to pay private mortgage insurance (PMI). While 20 percent is often presented as the gold standard of down payments, there may be situations where it actually makes more sense to your financial situation to put less down—and some mortgages even offer the opportunity to put no money down. Here are a few things to consider when determining what down payment makes sense for you when buying a home.

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What is a Down Payment?

A down payment is money paid upfront when buying a house. This initial payment signifies your investment in the property you are purchasing. Most often, down payments are talked about in terms of percentages, as they represent that portion of the home’s purchase price. The rest of the purchase price is then covered by your mortgage.

Homeowners typically put down between 3 percent and 20 percent, but what you put down may depend on your loan type, the amount you have in savings, how much debt you have compared to your current income, if you need to spend any money on home repairs, how close you are to retirement, and more.

A down payment is separate from closing costs, which usually range from 2 percent to 5 percent of the purchase price. Your down payment and closing costs are paid when you complete the purchase of your home.

What is Private Mortgage Insurance?

If you choose to put down less than 20% for a down payment, you may be required to buy private mortgage insurance (PMI). PMI is a type of mortgage insurance that protects lenders against loss if borrowers do not make their loan payments.

PMI is arranged by your lender, and, most often, the premium for your PMI is paid monthly as an addition to your mortgage payment. The amount you will pay for mortgage insurance depends on a few factors, including the size of your down payment and your credit score. But most often, borrowers pay between 0.2 percent and 2 percent of the loan amount per year in PMI.

What are the Benefits of Putting Down Less than 20% for a Down Payment?

Buying a home is a big financial decision, and when you are deciding what size down payment makes sense to you, there are a few things you can consider. With a smaller down payment:

  • You Can Buy a Home Sooner: Saving for a home takes time, especially if you are aiming for a significant down payment. But as home prices continue to rise, it might make sense to purchase a home sooner. A fixed mortgage rate will mean that your housing costs will stay the same even as cost of living rises. If you can make your dream of home ownership a reality now with a smaller down payment, you may be setting yourself up for better value in the long run.
  • Your Monthly Payments Can Be Equity Rather Than Rent: When you make a mortgage payment, you are building valuable equity in your home. Equity in a home is the amount of money a homeowner would be paid after selling a home and paying off any associated debt. So, if your home is worth $300,000, and you have a mortgage of $100,000, that means the equity in the home is worth $200,000. Each payment you make would help that equity grow, building valuable security for the future.
  • You Can Free Up Cash Flow for Other Priorities: It may make sense to not tie up your entire savings in a down payment so that you reserve available cash for home repairs, emergencies, investment opportunities that can grow your savings, and other expenses. Once you have used funds toward a down payment, you are not able to access that money without selling your home or opening a HELOC or HELOAN.

Once you have built up at least 20 percent equity in your home, you can request PMI removal from your lender. Most lenders will also automatically cancel PMI once your principal balance reaches 78 percent of the original value of your home. Once you no longer have PMI, your monthly mortgage payments will be lower.

What are the Potential Drawbacks of Putting Down Less Than 20%?

When you purchase a home with less than 20 percent down, most lenders will require you to pay PMI, which runs between 0.2 to 2 percent of your loan amount per year. The PMI premium is combined with your mortgage payment and will raise your monthly payments until you reach the 20% threshold of equity.

Borrowers who put down 20 percent may also qualify for a lower interest rate or be seen as more competitive buyers if a property has multiple offers.

There are many considerations when it comes to deciding what type of mortgage and down payment will work for you. When you apply for a mortgage with Credit Union 1—online, over the phone, or at a local branch—our team members will be with you every step of the way.