When you buy a home, some financial experts recommend making the largest down payment possible, while others suggest financing as much of your purchase as possible. The right answer depends on market conditions and your circumstances.
“Its important to ask the right questions about how various down payment amounts will affect your mortgage insurance and mortgage payments,” says Keith Gumbinger, vice president of HSH.com. “You need to figure out if its worth begging your parents for a certain amount of cash so you’ve got enough money to make a larger down payment, or whether a smaller one will do.”
Before you resort to the Bank of Mom and Dad for down payment assistance, whether that be gift money or a loan, it might help to know the pros and cons of a large down payment, and some possibilities for raising this up-front money.
Putting down a large down payment when buying a house has its advantages and disadvantages. While a bigger deposit can lead to lower interest rates and monthly payments, it also requires you to tie up more of your capital upfront. Below, we’ll explore the pros and cons of making a large down payment so you can decide what makes sense for your situation.
What is Considered a Large Down Payment?
Traditionally, 20% of the purchase price has been seen as the ideal down payment amount. However, today’s buyers have more flexibility:
- FHA loans allow down payments as low as 3.5%
- Conventional loans can have down payments as low as 3%
- USDA and VA loans require no down payment
The median down payment for first-time buyers is around 6% of the purchase price. For repeat buyers, the median rises to 17% as they often have equity from a previous home to put down.
In expensive markets like San Francisco or New York, down payments tend to be larger, sometimes even exceeding 20% That’s because home prices in these areas often surpass conforming loan limits, requiring jumbo loans that call for higher down payments.
Pros of a Large Down Payment
Here are some potential benefits of putting down 20% or more:
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Lower mortgage amount. With less to finance your loan balance will be smaller. This gives you more home equity cushion against declining home values.
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Lower interest rate. Lenders see higher down payments as less risky. So you may qualify for a lower rate with a bigger down payment, reducing interest costs.
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Less interest paid. Combining a lower loan amount and interest rate saves significantly on interest over the loan term.
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Lower mortgage insurance. With a bigger down payment, you may pay lower premiums for private mortgage insurance or exit PMI sooner.
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Budgeting practice. Saving for a large down payment is good preparation for making ongoing mortgage payments.
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More affordable payments. All of the above can make your monthly mortgage payment lower and more manageable.
Cons of a Large Down Payment
While there are benefits, there are also some potential drawbacks to consider:
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Delayed homeownership. It may take longer to save for a 20% down payment, postponing your entry into the housing market.
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Less flexibility. Tapping savings for your down payment leaves you with less of a financial cushion for unexpected expenses.
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Interferes with other goals. Money put into your down payment isn’t available for other needs like retirement or college savings.
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Long-term benefits. Perks like interest savings accumulate over years. If you move soon, you won’t gain the full advantage.
Ultimately, the pros and cons depend on your personal financial situation and plans. Next, let’s look at some strategies for funding a large down payment if that’s your goal.
How to Make a Large Down Payment
If you’ve weighed the trade-offs and decided to go for a sizable down payment, here are some options for getting the funds together:
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Personal loan. You can take out a separate personal loan, but this will add to your overall debt obligations. Also, some mortgage programs restrict down payment loans.
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Down payment assistance. First-time buyers may qualify for down payment grants and low interest loans through state housing agencies and nonprofit groups.
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Sale of assets. You may be able to cash in investments, jewelry, collectibles or recreational vehicles.
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401(k) loan. You can borrow against your 401(k) balance without tax penalty. But this jeopardizes retirement savings, and loans typically must be repaid if you leave your job.
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Budgeted savings. Setting aside a portion of your regular income month after month takes discipline, but gets you to your goal over time.
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Gift from family. Receiving a monetary gift from relatives is a common way for first-time buyers to get help with their down payment.
No matter how you raise the funds, be sure to weigh both long-term and short-term trade-offs before committing to a large down payment. The right choice depends on factors like your income, job stability, lifestyle, and how long you plan to stay in the home.
Alternatives to a Large Down Payment
While a 20% down payment has long been the standard advice, today’s buyers have more options:
Lower Down Payments
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FHA allows down payments as low as 3.5% of the purchase price. Monthly mortgage insurance is required.
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Conventional 97 loans only require 3% down with private mortgage insurance.
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USDA and VA loans need 0% down for eligible borrowers. Funding fees apply.
Mortgage Programs
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Fannie Mae HomeReady and Freddie Mac Home Possible offer 97% LTV loans with income limits.
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State and local down payment assistance grants help first-time buyers bridge the down payment gap.
Alternative Financing
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Shared appreciation mortgages exchange a lower down payment for shared equity with the lender.
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Seller-funded down payment assistance programs have the seller contribute 3-9% of the home price toward your down payment.
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Community land trusts offer homes well below market value in exchange for limits on equity growth when you go to sell.
Key Factors in Deciding on Down Payment Size
If you’re debating down payment size, here are some important considerations:
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Home prices and loan limits – In a high-cost area, you may need a larger down payment to stay under conforming loan limits or even jumbo loan requirements.
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Mortgage rates – Compare the rate reduction you’d get from a larger down payment to determine if it’s worth it.
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Timeframe – If you’ll move soon, a larger down payment may not pay off enough to be worthwhile.
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Savings and assets – Make sure you have enough set aside for a down payment emergency fund before committing.
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Monthly budget – Will a higher down payment sufficiently reduce monthly payments to make it affordable?
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Long-term plans – How long do you plan on staying put? Large down payments favor long-term owners who can realize compound interest savings.
Talk to a Mortgage Professional
Determining the down payment amount that best fits your financial situation and goals requires a close look at the numbers. Speaking with a loan officer or mortgage broker can provide key insights through their experience and access to mortgage rate data.
A mortgage pro can run the exact scenarios to show you how different down payment amounts affect your loan amount, interest rate, monthly payments, and long term interest costs. They can also explain how factors like loan type, credit score, debt-to-income ratio and location impact your options.
While a 20% down payment has long been the benchmark, today’s market offers many more down payment choices through both loan programs and creative alternative financing options. Taking time to understand the trade-offs will help you make a well-informed decision on the down payment size that best balances your financial capabilities and homeownership dreams.
Is it better to put a large down payment on a house?
According to Fannie Mae, the biggest obstacle to first-time buyers is coming up with money for a down payment and closing costs. So, doesnt it make sense to lower this hurdle as much as possible by minimizing the down payment?
Maybe, but there are also several benefits to a larger down payment.
What is the average down payment on a house?
According to the National Association of Realtors 2022 Profile of Homebuyers and Sellers, the typical downpayment for first-time homebuyers was 6% of the home’s purchase price. For repeat buyers, who often have equity to leverage, the downpayment amount rises to 17% of the purchase price.
While 20 percent of the purchase price is a traditional target for a down payment, loan programs from Federal Housing Administration (FHA) and conforming loans (conventional mortgages backed by Fannie Mae and Freddie Mac) both allow for much smaller down payments.
In fact, conforming loans can have minimum down payment requirements as low as 3 percent of the sales price of the home, though people generally make a larger down payment on a conventional loan for a variety of reasons. It’s also technically possible to put no money down, too, as VA loans (Department of Veterans Affairs, available to service members and veterans) and USDA loans (U.S. Department of Agriculture-backed loans, serving mostly rural areas) don’t require a downpayment at all. Like FHA’s upfront mortgage insurance premium, USDA and VA loans do have percentage-based guarantee or funding fees that must be paid. These are usually financed into the loan amount, and help protect these programs against loss.
The typical size of a down payment varies greatly depending on the local real estate market. For example, its common to see lenders require down payments of 20 percent from jumbo loan borrowers. In some cases, the down payment required will depend on the type of loan you choose; where lenders often sell fixed-rate mortgages soon after they are originated, most lenders hold adjustable-rate mortgages (ARMs) in their own portfolios of loans (and so accept all of the loan’s risk). As such, ARM lenders may require a 10% down payment or more for this type of loan.
According to a survey by Realtor.com, in the first quarter of 2023 the median down payment size in the U.S. was 13% of a home’s purchase price. Down payment sizes in places such as El Paso, TX were as small as 5.4% while home buyers in the San Jose-Sunnyvale-Santa Clara, CA metro area plunked down an average of 22.9 percent when buying a home.
Why such wide differences? In large part, it is because home prices in expensive markets such as San Jose often exceed the conforming loan limits for the area; lenders often require more sizable down payments on private-market jumbo loans, and most homebuyers in these markets aren’t eligible for government-backed or conventional low down payment loan programs. In some cases, borrowers in these markets make sizable down payments in order to get under the local conforming loan limit in order to have access to lower cost loan options or fixed-rate mortgages. In these high-cost markets, this compounds the difficulty of saving for a down payment — not only are home prices higher, but a greater percentage of the price may need to be paid upfront.
Fortunately, in many areas of the country home buyers have some flexibility as to the size of their down payments. If you have a choice, is it better to put a large down payment on a house, or save your current resources by borrowing as much as possible?
Is It Better to Put a Large or Small Down Payment on a House?
FAQ
Is it better to put a large down payment on a house?
A higher down payment means lower monthly costs
That said, there are benefits to making a higher down payment. Namely, when you put more money down up front, you’ll pay less per month and less interest overall.
Is it better to have a larger deposit?
A larger deposit does more than just unlock better rates. It can also make it easier for you to get approved for a mortgage. With a bigger deposit, lenders see you as less of a risk, which can mean better terms for your loan. So, if you’re able to save more before you buy, it can really pay off.
What are the disadvantages of a large down payment?
What is a 20% down payment on a $400,000 house?
On a $400,000 home, a 20% down payment equals $80,000. This amount might seem high, but it significantly reduces your monthly mortgage payment. Additionally, you’ll save on PMI and could even qualify for a lower mortgage interest rate, depending on your credit score and financial history.