The Math Behind Putting Down Less Than 20%
July 21, 2022
This might come as a surprise, but you don’t actually need to put down 20% on your home. In fact, for first-time homebuyers, the average down payment is just 6% — and it’s possible to put down even less. But how does the math shake out in your monthly mortgage payments?
Let’s break down the numbers behind putting down less than 20%.
Add in Primary Mortgage Insurance
If your down payment is less than 20% and you have a conventional loan, your lender will require private mortgage insurance (PMI), which is an added insurance policy that protects the lender if you can't pay your mortgage. This payment will be added onto your monthly mortgage bill, requiring you to spend slightly more per month.
Some lenders offer loan products that do not require you to have PMI. However, in return, these lenders will often charge higher interest rates.
The cost of PMI varies based on your credit score and your loan-to-value ratio (the amount you owe on your mortgage compared to its value). It also depends on the insurer. You can expect to pay between $30 and $150 per month for every $100,000 you borrow.
Some types of loans, such as FHA loans, do require you to pay PMI for the life of the loan. However, for many other types of loans, once you've built 20% equity in your home, you can ask your lender to cancel your PMI and remove that expense from your monthly payment.
Add in Principal and Interest
When you put down more cash up front, the amount of money you need to borrow decreases. The less you borrow, the lower your monthly payment (principal + interest).
To help you understand the math, here’s an example of how different down payment amounts affect your monthly mortgage payment, PMI and total monthly expenses over the life of your loan.
A $200,000 Home: 5% Down vs. 20% Down
| 5% Down Payment | 20% Down Payment | |
|---|---|---|
| Down Payment Amount |
$10,000 |
$40,000 |
| Loan Amount |
$190,000 |
$160,000 |
| Mortgage Term |
30-year fixed rate |
30-year fixed rate |
| Interest Rate |
4.5% |
4.5% |
| Monthly Mortgage Payment (Principal + Interest) |
$962.70 |
$810.70 |
| PMI |
$80.75* |
$0 |
| Total Monthly Payment (Excluding Property Taxes, Insurance) |
$1,043.45 |
$810.70 |
*Assumes a PMI rate of 0.51% – in this case, applicable with a conventional loan until you have 20% equity in your home or for the life of the loan with a FHA loan.
Calculating the Pros and Cons
When weighing the pros and cons of different down payment options, keep in mind:
- Homebuyers who put at least 20% down don't have to pay PMI, and they'll save on interest over the life of the loan.
- Putting 20% down is likely not in your best interest if it would leave you in a compromised financial position with no financial cushion.
- If mortgage rates are low when you are buying, a lower down payment can help you take advantage of economic conditions.
A housing counselor and your lender can help you understand the different down payment options available and determine what makes sense for you.
The Bottom Line
It is possible to get a mortgage without a 20% down payment. However, a lower down payment up front means bigger monthly mortgage payments — but it also means becoming a homeowner sooner.
For more information and tools about buying a home, including down payment assistance programs and low down payment mortgage programs, visit My Home by Freddie Mac®.