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Down Payments & Closing Costs

 What You'll Learn

  • A growing number of today’s borrowers are making down payments that range from 5 to 10%
  • You’ll have to pay Private Mortgage Insurance (PMI) with down payments of less than 20%.
  • Closing costs are generally 2 to 5% of the your home purchase price

If you're in the market to buy a home, your down payment is probably top of mind.  It's likely you’ve heard the rule of thumb that you shouldn't buy a home unless you can put 20% down, however:

It’s a fact that the more you put down, the lower your monthly mortgage payment and the less you'll owe the bank. It's also a fact that homebuyers who put at least 20% down don't have to pay PMI, an added insurance policy that protects the lender if you are unable to pay your mortgage. However, if putting 20% down will deplete all of your savings and leave you with no financial reserves, it's probably not in your best interest.

While you’ll have to pay PMI for a conventional loan with a down payment of less than 20%, you'll still be able to take advantage of today's low mortgage rates and affordable home prices in many parts of the country.

Once you've built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment

A Math Challenge:
A $200,000 Home: 5% Down vs. 20% Down

  5% Down Payment 20% Down Payment
Down Payment $10,000 $40,000
Loan Amount $190,000 $160,000
Mortgage Type 30-year fixed-rate 30-year fixed-rate
Interest Rate 4.5% 4.5%
Monthly Mortgage Payment (Principal and Interest) $962.70 $810.70
PMI $80.75* $0
  $1,043.45** $810.70**

*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans

**Does not include property tax and homeowners insurance payments

Carefully evaluate your finances to determine how much you can afford and talk with your lender or housing professional about the down payment option that makes best sense for you.

Closing Costs

Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage.  These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. 

Closing costs are typically between 2 and 5% of your purchase price

These include:

  1. Government recording costs
  2. Appraisal fees
  3. Credit report fees
  4. Lender origination fees
  5. Title services
  6. Tax service fees
  7. Survey fees
  8. Attorney fees
  9. Underwriting fees

Key Takeaways

  1. With Freddie Mac’s Home Possible AdvantageSM, qualified borrowers can put as little as 3% down

  2. Once you've built equity of 20%, you can cancel your PMI and remove the expense from your mortgage payment

  3. When planning your home purchase finances, it’s critical to account for closing costs

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