What Size Down Payment Should You Make?

Most types of mortgages require you to put some money down when you buy a home. If you have financial flexibility, and if the mortgage product allows it, you may be able to choose to put down a larger or smaller amount. What size down payment should you make? Let’s go over the pros and cons of putting down 20%, more, or less. We’ll also offer recommendations for when each option makes sense.

Should You Put 20% Down?

20% is considered the “default” amount for a down payment. A lot of people believe that it is the minimum down payment for a conventional mortgage. But conventional mortgages can have down payments as low as 3%. FHA mortgages can also feature low down payments. Some types of mortgages, like VA, can have zero down.

So, should you put 20% down if you have a choice to put down more or less? Here are the pros and cons.

Pros:

• A significant chunk of your mortgage will be paid off, which can reduce your monthly payment amounts.
• You may qualify for more competitive interest rates than if you put down less.
• You can avoid PMI, saving more money.

Cons:

• You need to be able to make a large upfront investment in your home.
• Putting all that money into your home means it is not available for other uses (i.e. stock investments, emergency fund, etc.).

Best For:

Putting 20% down is a good move if you can afford it without depleting your savings too much, and still have room to work toward other financial goals. It’ll save you money over the long term by sparing you from PMI and higher interest rates.

Should You Put Under 20% Down?

Let’s say you have the option to buy a home with a smaller down payment. Is it worth it?

Pros:

• Your finances will stay more liquid. You’ll be able to keep more cash on hand.
• You will be able to keep more money in other investments.
• You can move into a home now instead of waiting to save up 20% (you may not even have access to 20% right now).
• You will not have to pay for mortgage insurance if you have paid over 20% upfront on a home.
• For some people, it may feel psychologically easier to not have to part with such a large amount of money all at once.

Cons:

• You might get saddled with PMI depending on the type of mortgage you have.
• Your interest rates may be higher than they would be otherwise.
• Your monthly payments will be higher since the amount you did not put down upfront will be spread across the duration of the mortgage.
• You will take longer to build equity.

Best For:

Consider a smaller down payment if you cannot afford to put 20% down, and/or you are expecting a higher rate of return from other investments than the larger amount of interest will cost you.

Should You Put Over 20% Down?

You might be applying for a type of mortgage requires a down payment that exceeds 20%. Or, you could just be considering voluntarily paying more upfront when you buy a home. There is nothing forcing you to only pay the minimum down payment amount. Is it a good idea to put over 20% down?

Pros:

• In some cases, putting more than 20% down gives you access to mortgage products you could not otherwise qualify for. For example, depending on your borrower profile, you might sometimes be asked to put down as much as 30% for a jumbo loan.
• Your monthly payments will be lower if you put 20% down, since the remaining loan principal will be lower.
• You may have a lower interest rate if you put down more than 20%. Plus, you may be able to pay off the rest of the mortgage more quickly. A shorter loan term means less interest paid over the lifetime of the mortgage.
• For some people, it can be a psychological weight off to know that a large percentage of the mortgage is already paid.
• You will have a lot more equity in the home from day one.

Cons:

• Putting down a down payment in excess of 20% can reduce financial liquidity.
• If you put down a large amount of money upfront, in some cases, that could eat into the money available for retirement accounts and other investments.
• Some people may find it overwhelming to put down so much at one time.

Best For:

A down payment above 20% is best for those with the financial means to pay more upfront without it detracting too much from other financial needs and goals.

Buy a Home in Florida

Florida State Mortgage Group is based in Fort Lauderdale. We can help you buy a home or refinance anywhere in the state. To get started, please give us a call at (954) 359-3000 to schedule your mortgage consultation.