How Much Should You Put Down on a House?

Fran
Lucy Lazarony
October 8, 2020

A down payment is the part of a home’s price that you pay up front. A 20 percent down payment on a house has long been the rule of thumb because then you won’t have to pay private mortgage insurance (PMI). PMI is a type of mortgage insurance you’re required to pay on a conventional loan if you make a down payment of less than 20 percent. Like other kinds of mortgage insurance PMI protects the lender if you should stop making payments. And once you reach 20 percent equity in your home, you can ask your lender to cancel PMI.

If you make a down payment of less than 20 percent, PMI will be a part of your life until you reach 20 percent equity in your home so it is something to be aware of as a homebuyer. You’ll have lots of company making your PMI payments. According to the National Association of Realtors (NAR), the median down payment is 12 percent for all buyers, 6 percent for first-time buyers and 16 percent for repeat buyers. So all those home buyers will be paying PMI on top of their mortgages.

A Home Buying Snapshot

Lower down payments among home buyers are due in part to rising home prices, according to the NAR. And home buyers are finding it difficult to save for down payments for these pricier homes.

Seventeen percent of all buyers and 25 percent of first-time buyers used Federal Housing Administration (FHA) loans. These types of loans are insured by the FHA and issued by FHA-approved lenders. These loans are designed for low- to moderate-income borrowers. They require lower minimum down payments and lower credit scores than many conventional loans. They are good choices for cash strapped home buyers who are looking to buy their first homes.

How much are people paying for their homes? Home prices are a median of $257,000 for all buyers.

What kind of homes are they buying? The typical home purchased was 1,850 square feet, had three bedrooms, two bathrooms and was built in 1990.

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First-Time Buyers

The median age for first-time home buyers is 33. First-time home buyers make up 33 percent of buyers and many of them got a little bit of help with their down payments. A third of first-time buyers received down payment help from family and friends. And 23 percent of first-time buyers moved from a family or friend’s residence directly into the home they purchased. So they were getting assistance with their living arrangements prior to the move to a new home.

So don’t be shy about needing help for a down payment for a house. You may have family members and friends who are willing to help. You just have to ask.

Deciding on a Down Payment

How much should you put down in a down payment for a home? The cost of your home, how much money you have in cash reserves, your salary and monthly income are all factors to consider.

First off is the price tag on the home. How much is it? And is it something you can comfortably afford with your monthly salary? Or will it be a stretch? You want your monthly mortgage payment to be a just right amount for you and your budget.

How much do you have in savings? The bigger the down payment you can make the lower than monthly mortgage payment. Your cash on hand is such a big consideration. Are you putting all the cash into the down payment for a house or are you putting some cash aside for maintenance and repairs and upgrades for your new home?

Weigh the pros and cons carefully. If you have a fixer upper home you may wish to put more cash aside for repairs and upgrades. If you are buying a newer home with few repairs on the horizon you may want to push more cash into your down payment.

Crunching the Numbers

Choosing a down payment amount takes some time. Play with the numbers. Let’s say you are looking to buy a $200,000 house. A 20 percent down payment would be $40,000 and a more doable 10 percent down payment would be $20,000. A six percent down payment, the amount for first-time buyers, would be $12,000. What amount is within reach for you and your family?

Ready for more number crunching? Here’s the information that you’ll need to calculate your monthly mortgage payment. You will need to input the home price, down payment amount, mortgage interest rate and loan type such as a 30-year fixed or 15-year fixed mortgage. SmartAsset and Bankrate.com are among the sites with free mortgage calculators. So use the calculators to find the right down payment amount and monthly mortgage payment amount for you.

Finding the Cash

You’ve found the home you want and now it is time to find the cash for the down payment.

Repeat Buyers Have the Edge. Repeat buyers who have positive equity can use the money from the sale of the previous home for a down payment for a new home. They can be out of one house and into a new one before you know it.

Tap Savings. Here’s all the money you have tucked away for some day. Time to reach into your savings and use the cash for a new house.

Sell a Car. Downsize from two cars to one and have the money go to the down payment for the house. One of you will get by on public transportation and Ubers and getting rides to and from work. And you’ll both have much more money for that down payment for your house. Between gas, car insurance and auto maintenance there is a lot of money to be saved. That monthly mortgage payment will be easier to make as well.

Sell Unneeded Electronics. Combined you have more laptops and tablets than you could ever need. Sell the leftovers and save money for the down payment for your house.

Sell Unneeded Home Items. Are there other items around your home that you don’t need? A bicycle that you used for college that you barely use? Are there items of furniture that you don’t use and you don’t plan on taking to the new house? Now is the time to sell them.

Take on a Second Job. Use a side hustle to save the extra cash for your down payment and then use it to help pay for your monthly mortgage payment.

Financial Gifts from Family and Friends. Rather than a wedding or graduation celebration, you are buying a house and are looking for financial contributions to help make that happen. Ask your family and friends. They may want to help.

Reach Out to Down Payment Assistance Programs. Through down payment assistance programs employers, nonprofit organizations and state, county and city government organizations offer financial assistance to borrowers who need help with down payments. These are good organizations to tap for help with a down payment for your house.

Withdraw or Borrow Money from a 401(k) Plan. Home buying for a principal residence is one of the permitted reasons for taking a hardship withdrawal from a 401(k) plan. You still owe tax on the withdrawal and if you are younger than 59 ½ you also owe a 10 percent penalty on the money you withdraw. You’re taking a big bite out of your retirement here. So it is something to think over carefully.

You also can borrow from a 401(k) plan for your home’s down payment. You can borrow up to $50,000 or half the value of the account, whichever is less, as long as the money is going toward a down payment for a home. You’ll need to repay the loan generally within five years so this is not a borrowing decision to take lightly. And you’ll need to disclose the 401(k) plan loan to the bank when you are applying for a mortgage.

Whatever you do, make sure you have homeowners insurance on your home that you buy, not the lender. For the best value begin comparing rates by entering your zip code below.

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