Is It Better To Put A Large Down Payment On A House?

Is It Better To Put A Large Down Payment On A House?

This article is part of our series about financial literacy. You can find the links to the other articles at the bottom of the article.

In most cases, it’s better to put down a large down payment on a house if you have the money. However, if saving up for a large down payment causes you to wait for a long time before buying, you may want to consider buying now.

There are tons of factors to consider when wondering how much of a down payment you need. We’ll dive into each factor!

With the median U.S. home price nearing $300,000, most prospective buyers must finance a purchase using a mortgage. Most types of mortgages require a down payment of between 3% and 20% based on various factors. 

Aside from simply satisfying the minimum amount required, choosing a larger down payment has some potential advantages and disadvantages.

How Much Should You Put Down on a House?         

A down payment represents cash paid upfront when buying a property that is usually expressed as a percentage of the home’s total price. From the perspective of a lender, a down payment is among the factors that influence their assessment of risk when making lending decisions.

A bank or other lending institution looks at several factors when determining whether to issue a mortgage to a potential borrower. Considerations include the applicant’s credit score and history, current income, existing debt, and the amount of financing necessary for the purchase.

Lenders view applicants with a poor credit score (below 620) or those with large amounts of debt relative to their income as high-risk; therefore, these individuals might need 10-15% down to be approved for a mortgage that is not backed by the government. 

In this example, a motivated potential buyer may decide to begin an aggressive savings plan for satisfying the minimum requirement.

Homebuyers with satisfactory credit and income are less likely to encounter large down payment requirements for approval in today’s market. 

Lenders view these individuals as less risk, making them eligible for “conventional” mortgage financing with a lower 3-5% down payment requirement.

Conventional mortgages generally have lower interest rates and these borrowers are more likely to have some discretion regarding the amount of their down payment.  

Conventional mortgages represent one category or type available today, as government agencies support several other types of mortgages such as FHA, VA, and USDA loans.

Aspiring homeowners will find that a mortgage calculator is a valuable tool for instantly showing the impact of changing the many variables involved such as down payments, interest rates, and term (length) of the loan.

The Average Down Payment on a House

Over the last 50 years, the minimum down payment requirements for conventional mortgage products has continually declined from what was once 20%. The current minimum requirements vary according to the type of mortgage. 

The following chart outlines the general qualifications associated with different types of mortgages.

Type of Mortgage Minimum Down Payment RequirementMinimum Credit Score Required
Conventional Loan3%620 (may vary among lenders)
Federal Housing Administration (FHA Loan)3.5%500-580
Department of Veteran Affairs (VA Loan)0%N/A
U.S. Department of Agriculture (USDA Loan)0%640 (may vary among lenders)
The Average House Down Payment

The government implemented FHA, VA, and USDA loans to expand homeownership opportunities and real estate affordability by backing (guaranteeing) some portion of the loan to incentivize lenders.

Based on the estimated U.S. median home price of $300,000, conventional borrowers average at least a $9,000 (3%) down payment. 

Down payment amounts among first-time homebuyers using conventional mortgages have recently averaged 7%. In this same scenario, the majority of FHA mortgage borrowers would likely put the minimum $10,500 down.

Advantages of a Large Down Payment on a House 

Smaller Mortgage Loan Balance

The overall loan amount (principal) declines based on the size of the down payment. For example, making a 10% down payment ($30,000) on a $300,000 home leaves a balance of $270,000.

Having a smaller mortgage loan balance translates to reduced amounts of debt and establishes some equity in the home. Having a lesser principal amount by making a down payment means home buyers have lower monthly payments and are closer to paying off the home loan.

A homeowner builds equity in real estate as they begin paying back their mortgage. For example, home buyers with a $150,000 balance remaining on their mortgage for a home appraised (valued) at $300,000 have $150,000 or 50% in home equity.

Every dollar you add to the down payment is one less that you must borrow. Depending on the term of the loan, a larger down payment can lower monthly payments. Which could then result in greater discretionary income each month that could be saved or invested.

Choosing a larger down payment amount also enables you to consider a mortgage with a shorter term.  A home is generally among the largest purchases we make and roughly 90% of borrowers in the U.S. today opt for a 30-year repayment term based on monthly affordability.

First-time homebuyers today have unprecedented levels of student loan debt and may assume a car or personal loan or other competing expenses or obligations. Depending on the home’s value, a 15-year term loan may be feasible for those with a significant down payment.

A 15-year mortgage has benefits including:  

  •  A lower interest rate
  •  Equity builds more rapidly
  •  Have high monthly payments, but saves the borrower a massive amount of interest

For example, on a $300,000 mortgage with 10% down and a 4% interest rate, a borrower can save more than $89,000 in interest.

Lower Mortgage Rates

Future homeowners having more sizable down payments may qualify for lower interest rates as it reduces the lender’s risk, thus potentially creating some leverage. 

A seemingly small rate increase or decrease appears much more substantial when considered over the span of a 15 to 30-year mortgage term. The following table assumes a $300,000 home with a $30,000 down payment (10%) on a 30-Year mortgage term.

Interest Rate Annual Payment Total Paid Total Interest Paid
5.25 %$17,891.40$536,742.00$266,742.00
4.50 %$16,416.60$492,498.12$222,498.12
3.75 %$15,004.95$450,148.36$180,148.36
3.0 %$13,659.97$409,799.12$139,799.12
Home Payment by Interest Rate

Less Interest Expense 

Answering questions such as is it better to put a large down payment on a house requires interest-related considerations. Since interest rates are based on the amount borrowed, the size of a down payment impacts the overall interest expenses.

The following table assumes a $300,000 home purchase price at a 4.0% interest rate with a 30-year mortgage term.

Down Payment Total Interest Paid
$60,000 (20%)$172,486.82
$45,000 (15%)$183,267.24
$30,000 (10%)$194,047.67
$15,000 (5%)$204,828.09
$9,000 (3%)$209,140.26
Interest Paid by Down Payment Size

Lenders Will Be More Likely to Compete for Your Business

Those seeking a mortgage with less-than-perfect credit scores often find that having a more substantial down payment may allow them more options. Some lenders who otherwise wouldn’t compete for your business are more receptive when the borrower has a 15-20% down payment.          

Lenders will compete with one another by offering different rates and fees in many cases. Keep in mind that you’ll typically need to obtain competing home loan estimates in writing

Competitive lenders also have different fees and expenses associated with closing costs, which is also a major consideration when purchasing.  Buyers and sellers each have closing costs. Buyers commonly pay from 3 to 5% of the home’s purchase price that may include:

  • Loan origination fee
  • Application or processing fee
  • Costs of property appraisal
  • Escrow funds allocated for taxes and homeowner’s insurance premiums
  • Title search and insurance fees
  • Inspection-related expenses for lead paint, pests, flood certification, and others

No Private Mortgage Insurance         

The majority of lenders will require borrowers lacking a 20% down payment to maintain private mortgage loan insurance (PMI). 

PMI or mortgage default insurance provides the lender with some protection if a borrower fails to satisfy their mortgage obligation and typically the costs range from .58% to 1.86% on the loan amount. 

The following table assumes a $300,000 home purchase price.

Down Payment Balance Annual PMI Estimated @ 1% Per Month
3% = $9,000$291,000$2,910$242.50
10% = $30,000$270,000$2,700$225.00
15% = $45,000$255,000$2,550$212.50
20% = $60,000$240,000N/AN/A
PMI costs by Down Payment Size

LTV represents another way that lenders assess risk. The cost of PMI may vary based on the quality of a homeowner’s credit history and currently is tax-deductible up to certain income limitations.  

It’s also worth noting that if you come in with a good credit score and a large down payment, you would be paying a very low PMI. If you paid a 10% down payment with a credit score that’s 720 or above, you can often expect to pay less than $100 per month in your PMI payment. (Probably $50 or less.)

I don’t have data to cite this, but I’ve seen it among most of my first time home buyer friends. 

Disadvantages of a Large Down Payment on a House 

You Give Up a Chunk of Your Cash Reserves   

Prospective homebuyers each have a unique set of financial circumstances and goals that may influence decisions regarding the size of a down payment. 

Those who spend every last dollar in their savings account might place themselves in a vulnerable position if emergencies arise such as unforeseen repairs or have to postpone saving for retirement.

Having minuscule cash reserves creates susceptibilities, particularly among first-time buyers who are unaccustomed to the additional financial responsibilities associated with owning a home. 

Property owners without sufficient savings commonly begin incurring harmful credit card debt or neglecting student loans.   

Aspiring homeowners that spend many months or years accumulating a larger down payment often delay their purchase. During this time, you likely continue to make rent payments and may find that home prices have risen considerably when you are finally prepared to buy.

Let me repeat that: there is a huge opportunity cost in waiting to buy a home.

I live in Utah, where home prices have been going up steady over the past decade. Over the past year, they’ve been skyrocketing! 

I’ve been in my home for almost a year and a half (as of April 2021), and have already seen my home appreciate by 15%! 

I got into my home with 5% down. If I had waited another 12 months, my home price would have been way higher! And I would have lost out on much of the equity that I built.

If you’re in the western United States, Texas, or in a big city, the housing market is most likely booming for you. In which case waiting to save up a larger down payment could be a decision that doesn’t make as much sense.

Just remember: you can always refinance your loan later on down the road. If you have at least a 680 credit score and a 5% down payment, waiting to save up a down payment could be a big mistake.

On the other hand, if you live in a market that doesn’t appreciate much, like in much of the Midwest or the South, waiting another 6-18 months to save up a down payment might make sense. 

And if your credit score is below 680, you should definitely work on building your credit before getting a house. If you have to wait 3-6 months to get your credit score from 630 to 680, do it! That is one circumstance where waiting makes sense. 

(You may want to check out my articles on How to Build Credit with Bad Credit and How to Build Credit at 18 if that’s the situation that you are in.) 

It all depends on your individual circumstances! 

You Could Lose Your Equity if Home Values Drop     

Earlier, we addressed the concept of home equity as something you build as you reduce an outstanding mortgage balance. While property values traditionally rise, housing is a market that is subject to volatility.

If housing prices dip, it’s possible that homeowners could owe a mortgage balance that now exceeds the current value of the property. This means that the property owners have negative equity, which sometimes is referred to as being “underwater.”

Another less likely scenario that represents a drawback to making a large down payment may result from a foreclosure. For example, if shortly after buying a home you lose your job and are unable to make mortgage payments, you could lose the entire down payment amount.

You’ll Need Private Mortgage Insurance

PMI applies to conventional mortgages for borrowers lacking a 20% down payment. When a borrower’s remaining mortgage balance reaches 78% the lender is obligated to cancel the PMI requirement. 

FHA loans have a different variation of mortgage insurance that is calculated upfront and often is paid for the full term of the loan.

VA loan programs don’t specifically have mortgage insurance or PMI payments; however, a funding fee is typically financed into the loan. USDA loans feature a Guarantee Fee, which is usually escrowed throughout the monthly loan payments.

Many state and local governments will offer down payment assistance programs. Despite being hard to find or qualify for, grants represent the most appealing form of loan program assistance because they require no repayment.

Things to Consider When Making a Down Payment

Your Mortgage Rate

Buyers with good credit (720+) might assess how securing a lower interest rate can offset the additional costs of having a reduced down payment.

Mortgage interest rates are a variable subject to volatility based on forces in the market. Current rates may not only influence decisions regarding the amount of a down payment but also possibly whether to purchase at a given time or not.

The following table is based on a 30-Year fixed loan average. (Source)

YearRateEstimated Total Interest:$300,000 Home; 5% Down Payment
199010.13 %$625,260.28
19957.93 %$462,841.78
20006.97 %$395,534.44
20055.87 %$321,589.92
20104.69 %$246,505.89
20153.85 %$195,997.25
Historical Mortgage Rates

The interest rate on a mortgage loan is broadly categorized as either fixed or adjustable (ARM). The rate of a fixed-rate mortgage doesn’t change, while ARM’s change according to some established schedule.

When interest rates are low, a fixed-rate mortgage is preferable. With an ARM you might face rising future rates that result in higher monthly mortgage payments; however, often these loans offer lower initial rates for a period.  

A “jumbo loan” or “jumbo mortgage” is used in regions where property values are high. In 2020, the threshold for a jumbo loan was $510,400, and they are typically viewed as high-risk by lenders and often have higher interest rates. 

Mortgage Insurance 

Borrowers with less than a 20% down payment may consider asking lenders about unique ways of avoiding PMI, such as paying it as a lump sum upfront. A lender might also consider waiving the PMI requirement in exchange for a higher interest rate or other creative arrangements.

Interest Payments

Homebuyers should prioritize interest when making decisions regarding down payments and the other potential variables. One strategy to reduce interest involves making extra monthly purchase mortgage payments.

Buyers who assume a mortgage may also consider refinancing their loan at a later date to reduce interest. Refinancing involves replacing your current mortgage with another, which often makes sense based on the circumstances.

Prospective homeowners should remember the importance of shopping around and exploring the mortgage lender options in the market. 

Many different banks, credit unions, and other financial institutions offer mortgage financing and a mortgage broker or loan officer may assist you in navigating this volatile market.

Concluding Thoughts

If you have 5% down to buy a home now, and you live in a housing market that is steadily going up, then you should buy! 

If you live in a market that is more or less flat (like many parts of the Midwest or South), then waiting an extra 6-12 months to save up more of a down payment may make sense.

To continue learning about financial literacy, see the following articles in the series:

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