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June 20, 2017

The Math Behind Putting Less Than 20% Down

Homeownership

Did you know that you could buy a home with a down payment of less than 20% (assuming you otherwise qualify for a mortgage loan)? Lots of people do. If you want to join them, you need to understand some other important numbers and how they add up.

The average down payment among first–time homebuyers in 2016 was 6% and 14% for repeat buyers, according to the National Association of Realtors. It's possible to put down even less. For example, Freddie Mac's Home Possible® mortgage products let eligible homebuyers put down as little as 3%.

If your down payment is less than 20% and you have a conventional loan, your lender will require private mortgage insurance (PMI), an added insurance policy that protects the lender if you can't pay your mortgage for some reason. The cost of PMI varies based on your loan–to–value ratio — the amount you owe on your mortgage compared to its value — your credit score, and the insurer, but expect to pay between $30 and $150 per month for every $100,000 borrowed. The PMI may be cancelled once you've built 20% equity in your home.

Other types of loans might require you to buy mortgage insurance as well. Depending on the type of loan and its terms and conditions, the mortgage insurance might be added to your loan amount, thereby also increasing the amount of interest you pay over the life of the loan. In addition, you might have to keep paying mortgage insurance even after you achieve 20% equity in your home.

Here's an example to help you work through the math.

A $200,000 Home: 5% Down vs. 20% Down

 5% Down Payment20% Down Payment
Down Payment Amount

$10,000

$40,000

Loan Amount

$190,000

$160,000

Mortgage Term

30–year fixed rate

30–year fixed rate

Interest Rate

4.5%

4.5%

Monthly Mortgage Payment (Principal + Interest)

$962.70

$810.70

PMI

$80.75*

$0

Total Monthly Payment (Excluding Property Taxes, Insurance)

$1,043.45

$810.70

*Assumes a PMI rate of 0.51% — in this case, applicable with a conventional loan until you have 20% equity in your home or for the life of the loan with a FHA loan.

Basically, a lower down payment upfront means bigger monthly mortgage payments. But it also means becoming a homeowner sooner.

Learn more about down payments and down payment assistance.

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