What is a down payment?
Key takeaways
04 · ideas- Down payment = your upfront contribution; the rest comes from the mortgage
- Less than 20% down triggers PMI — an extra $100–200/month
- 20% down on $300k saves $72,000 in interest and PMI vs. 5% down
- FHA loans allow 3.5% down with 580+ credit score
Basic level
The essentials · 1 min
A down payment is the portion of a home's purchase price you pay upfront from your own savings. The mortgage covers the rest.
Example: You buy a $300,000 home.- 20% down payment = $60,000 upfront
- Mortgage = $240,000 (you borrow this)
- It reduces their risk — if you stop paying, they can sell the home
- It shows you have financial discipline
- It gives you immediate equity stake in the property
Below 20% down, most lenders require Private Mortgage Insurance (PMI):
- Costs $50–200/month (typically 0.5–1% of loan annually)
- Protects the lender, not you
- Cancels automatically when you reach 20% equity
- A pure extra cost with no benefit to you
- Conventional loan: 3%
- FHA loan: 3.5% (580+ credit score)
- VA loan: 0% (veterans only)
- USDA loan: 0% (rural areas)
Intermediate level
How it applies · 2 min
How down payment affects total cost
On a $300,000 home at 7% rate, 30-year loan:
| Down payment | Amount | Loan size | Monthly payment | PMI/month | Monthly total | Total cost over 30yr |
|---|---|---|---|---|---|---|
| 3% | $9,000 | $291,000 | $1,936 | $182 | $2,118 | $774,480 |
| 5% | $15,000 | $285,000 | $1,896 | $178 | $2,074 | $762,680 |
| 10% | $30,000 | $270,000 | $1,796 | $135 | $1,931 | $717,600 |
| 20% | $60,000 | $240,000 | $1,596 | $0 | $1,596 | $634,560 |
Going from 5% to 20% down costs $45,000 more upfront but saves $128,120 over 30 years.
When to consider less than 20% down
| Situation | Less than 20% might make sense |
|---|---|
| Local market appreciating rapidly | Buying sooner captures appreciation |
| PMI is relatively cheap | If home value rising faster than PMI cost |
| Investment opportunity | Putting difference in investments at 10%+ return |
| Strong rental income potential | Monthly rent covers PMI and more |
| First-time buyer programs | State/local grants may cover down payment |
The opportunity cost calculation
Should you save for 20% down or buy now with 5%?
Scenario: $300,000 home, 7% mortgage rate, 5% annual home appreciation
Option A: Buy now at 5% down- Borrow $285,000, pay PMI until 20% equity
- PMI period: ~7 years at $178/month = $14,952 in PMI
- Capture 5 extra years of appreciation during saving period
- Miss 3 years of appreciation on $300,000 at 5%: $300,000 × (1.05³ - 1) = $47,288 in missed gains
- Save $14,952 in future PMI
Break-even: If home appreciation exceeds PMI cost, buying sooner often wins — but depends heavily on your market and rent cost during saving period.
Advanced level
The math, step by step · 1 min
Down payment as leverage
The down payment determines your initial leverage ratio:
- 20% down → 5× leverage
- 5% down → 20× leverage
If a $300,000 home appreciates 5% ($15,000):
- 20% down ($60,000): ROI = 15,000/60,000 = 25%
- 5% down ($15,000): ROI = 15,000/15,000 = 100%
This is why real estate can generate outsized returns — leverage amplifies gains. But it also amplifies losses: if the home drops 10% (-$30,000) and you put 5% down ($15,000), your equity is wiped out and you're underwater.
PMI breakeven analysis
PMI cancels when loan-to-value (LTV) reaches 80%:
Where P_0 = original purchase price, B_0 = initial loan balance, r = monthly mortgage rate, g = monthly home appreciation rate.
With home appreciation, you hit 20% equity faster because both principal paydown AND appreciation contribute to equity. At 5% annual appreciation on a $300,000 home with 10% down, LTV drops below 80% in approximately 4.5 years — reducing PMI exposure significantly compared to a flat market.