Why the 20 Percent Down Payment Isn't Always the Best Option

Your down payment depends on the loan you choose.

Different loans require different down payments, from zero percent in the case of the USDA or VA loan to 3.5 percent on an FHA loan to varying levels on the different conventional loans on the market. While you may choose a low down payment loan product, you are not obligated to put down the minimum—you may choose to put more money down in order to increase your equity and limit the amount of money you’ll have to finance.

Private Mortgage Insurance (PMI)

One of the reasons most buyers assume they should have a 20 percent down payment is in order to avoid private mortgage insurance or PMI. For homes with less than 20 percent equity, most lenders require PMI in order to protect their stake in the loan in the event that your home value drops and you stop making payments on the loan. One exception is the VA loan, which at 0 percent doesn’t require PMI because of the amount of the VA entitlement, which usually amounts to more than 20 percent of the home’s value. In most cases, PMI is paid for each month and added to the mortgage payment, just like prorated insurance and tax payments, though it can be paid upfront as well. For low down payment products, like an FHA loan, PMI is required. You may then refinance into a conventional loan without PMI once you have reached 20 percent equity. In some conventional loan cases, you can ask the lender to waive PMI once you have reached 20 percent equity.

When a bigger down payment may be beneficial

Risks of a bigger down payment

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