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How Much Down Payment Do You Need on a House?

Saving for a house is no walk in the park—unless that park is a mountain. In fact, 1 of every 10 home buyers say the most difficult step in the home-buying process is saving for a down payment.1 But when you set a clear goal, you can see a light at the end of the tunnel. That clear goal is known as your down payment amount.

What’s a good down payment amount? Well, everyone has a different idea on this. But if you want your home to be a blessing, not a curse, we’ll walk you through the smartest way to decide how much down payment on a house you need.

What Is a Down Payment?

First, a down payment is the cash you pay up front to buy a house—it represents a percentage of the total home price. Here’s how it works: When you close on a house, you pay the seller your down payment amount—let’s say 20%—and then your lender covers the remaining 80%. That 20% is your stake in the ground and your first leap into homeownership.

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Every chunk of money you add to your down payment amount is your chance to trim how much you have to borrow from a lender. It’s simple really. The more money you save for a down payment, the less mortgage debt you’ll have—and the closer you’ll be to owning 100% of your home!

How Much Should I Pay for a Down Payment?

Aim for a down payment that’s 20% or more of the total home price—that’s $40,000 for a $200,000 house. This minimum is partially based on guidelines set by government-sponsored companies like Fannie Mae and Freddie Mac. Anything less than 20% is considered riskier for a lender—so, to cover their butts, they make the mortgage more expensive for you by adding things like private mortgage insurance (PMI).2

If you haven’t saved 20% after two years of intense saving, it’s okay to lower your goal to 15% or 10%, especially if you’re a first-time home buyer. But never buy a house with a down payment that’s lower than 10%—otherwise, you’ll be charged so much extra in interest and fees. It’s not worth it! You need that extra money to tackle home maintenance and your other financial goals.

How Much Does the Average Person Put Down on a House?

Recently, the average buyer put down a median down payment of 12%. Not too bad since that’s within our recommended 10–20% range, right? Still, you don’t want to settle with joining the bandwagon because down payment amounts have significantly decreased over time. Not to bore you with a history lesson, but 30 years ago the median down payment for all buyers was at a much healthier 20%!3

The reasons today’s buyers say they struggle to save a bigger down payment are all debt related: student loans (51%), credit card debt (45%) and car loans (38%).4 That’s why we teach people to pay off 100% of their consumer debt and to have a fully funded emergency fund (three to six months of living expenses) before saving for a house. That way, you’ll have enough room in your budget to save for a big down payment faster!

Do You Have to Put 20% Down on a House?

There are ways to buy a house with a down payment less than 20%. We already mentioned how an absolute minimum of 10% is doable. But beware! Some mortgage programs allow you to buy a house with a down payment as low as 3.5%—or even no down payment at all! That may sound tempting on the front end, but don’t be fooled.

Anything less than 10% is actually a very weak down payment, not to mention a sure-fire way to wind up upside down on a home. And you’ll waste a lot of money in interest and fees over the life of your mortgage.

How Low-Down-Payment Mortgages Actually Rip You Off

“Special” mortgage programs—ones that allow for a down payment that’s less than 10%—were designed for people who can’t get approved for a mortgage that meets traditional lending guidelines. But remember, lenders who approve low-down-payment mortgages end up taking more of your money in the long run. So, are they really helping people? We don’t think so.

To safeguard yourself, here are some rip-off mortgages to avoid:

  • FHA loan (Federal Housing Administration). An FHA loan allows you to purchase a house with a down payment as little as 3.5%. But in exchange, you’ll be charged an extra fee for the life of the loan—on top of all the extra interest you’ll pay and decades you’ll spend in debt for not saving up a big down payment. Bad idea.
  • VA loan (U.S. Department of Veterans Affairs). If you’re a veteran, a VA loan can help you get a house with no down payment at all! But when you put zero money down and things change in the housing market, you could end up owing more than the market value of your home—yikes! Also, VA loans come with a funding fee. No thanks.
  • USDA loan (U.S. Department of Agriculture). A USDA loan is designed to help people who can’t really afford to buy a home yet to get into a house with zero money down. But again, that’ll crush your financial goals over the years with all the added interest payments and extra fees! Plus, if you can’t afford to put any money down on a house, you’re not in an ideal place to be a homeowner and handle maintenance and all the other unexpected costs that come with homeownership.

How Does the Size of Your Down Payment Impact Your Mortgage?

The rule of thumb for down payments is this: A smaller down payment means you spend more on your home—a bigger down payment means you spend less. Why is this true? Because the size of your down payment impacts three things:

  • The need for PMI. If your down payment is less than 20%, you have to pay a monthly fee for private mortgage insurance (PMI)—a type of insurance that protects your lender if you stop making payments on your loan. PMI can cost anywhere from 0.5%–1% of your total annual loan amount, which you pay in monthly increments every year.
  • Your monthly mortgage payment. When you have a larger down payment, you borrow less money from a lender. And when you borrow less, you typically make smaller monthly mortgage payments, depending on the loan.
  • The total cost of interest. Since interest rates are a percentage of your loan amount, this becomes a no-brainer: The more money you put down in the beginning, the less you pay in interest because your loan amount is smaller.

As an example, imagine you take out a 15-year conventional mortgage at a 4% fixed interest rate on a $200,000 house. Using our mortgage calculator, let’s find out the total cost difference between a large down payment of 20% or a low down payment of 3%. (For simplicity, we’ll leave out things like property tax and homeowner’s insurance for now.)

 

Down payment

20%

3%

Loan amount

$160,000

$194,000

Monthly PMI fee

$0

$160

Monthly mortgage payment

$1,200

$1,600

Total interest paid

$53,000

$64,000

 

Notice how putting down 20% on your home, instead of only 3%, allows you to skip that pesky $160 PMI fee—which saves you nearly $2,000 during your first year of mortgage payments. Plus, if you use our mortgage payoff calculator, you can see that choosing the 20% option over the 3% one saves you more than $11,000 in total interest payments—cha-ching!

Benefits of a Large Down Payment

We get it. Saving for a down payment can be one of the most challenging, frustrating parts of buying a house. But patience and perseverance pay off—big time.

If you’re saving for a down payment and you haven’t reached at least 10%, don’t stop now. Practice a little delayed gratification. Putting down 20% will be well worth the hard work for five important reasons.

  1. You have a better chance at getting a mortgage.
  2. You’ll likely get a lower interest rate.
  3. You’ll make smaller monthly payments.
  4. You won’t have to pay PMI.
  5. You’ll pay off your home faster.

Don’t forget: A lower down payment doesn’t save you money. Factor in higher interest rates and hefty fees that come with this mortgage option, and you end up paying more than your home is worth. And that is never a good idea.

Want an Expert’s Help to Decide Your Down Payment Amount?

If you still have questions about how much of a down payment you need, talk to a loan specialist. A good loan specialist will help you understand the ins and outs of getting a mortgage and how your down payment will impact your home purchase. To work with a loan specialist you can trust and who actually cares about helping you get a mortgage you can pay off fast, talk to our friends at Churchill Mortgage.

Ready to Buy a House?

If you’ve already saved a down payment, but aren’t sure if it’s big enough to buy a home in your market, that’s where a real estate agent comes in. Agents who know your market like the back of their hand will quickly help you find homes for sale that match your budget. For a fast and easy way to find the best agents near you, try our Endorsed Local Providers (ELP) program.

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Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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