Last updated: March 2026
How Your Down Payment Affects Your Mortgage
Your down payment is the single biggest lever you have when structuring a mortgage. It affects your monthly payment, whether you pay PMI, your interest rate, and the total cost of your home over the life of the loan.
The 20% threshold is the most important number to understand. Below 20%, you pay Private Mortgage Insurance (PMI) — typically 0.35-1.0% of the loan annually. On a $350,000 home with 10% down ($315,000 loan), PMI costs $131-$263/month until you reach 80% LTV. That is $1,572-$3,156 per year in a cost that builds zero equity.
But waiting to save 20% has its own cost. In a market where home prices appreciate 3-5% annually, a $350,000 home becomes $360,500-$367,500 in one year. The extra down payment needed grows faster than most people can save. Sometimes buying with 5-10% down and accepting temporary PMI is the financially rational choice.
Below 5% down, options are more limited. Conventional loans allow 3% for first-time buyers. FHA allows 3.5%. VA and USDA offer 0% down. Each comes with different insurance requirements and qualification criteria. The interest rate also tends to be slightly higher with minimal down payments.
The smart savings strategy: set a target that balances buying sooner against PMI costs. For many buyers, 10-15% down with a plan to request PMI removal once home appreciation pushes them past 80% LTV is the pragmatic sweet spot. Never sacrifice your emergency fund for a larger down payment.
Frequently Asked Questions
How much down payment do I need?
Minimum down payments by loan type: Conventional (3-5%), FHA (3.5% with 580+ credit), VA (0%), USDA (0%). However, 20% down eliminates PMI and gives you the best rates. The 'right' amount balances what you can save against the cost of PMI and higher monthly payments.
Is 20% down payment still the standard?
No — the average first-time buyer puts down about 6-7%. While 20% eliminates PMI and reduces payments, it's not required. With home prices rising, saving 20% takes longer. Many buyers choose 5-10% down and accept PMI as a cost of buying sooner.
How much does PMI cost with less than 20% down?
PMI typically costs 0.35%-1.0% of your loan amount annually, depending on your credit score and down payment percentage. On a $280,000 loan with 10% down, expect about $117-$233/month. PMI drops off when your balance reaches 80% of the original home value.
Does a larger down payment get me a better rate?
Generally yes. Lenders view larger down payments as lower risk, which can qualify you for better rates. The biggest rate improvement typically comes at the 20% threshold. The difference between 5% and 20% down might be 0.125-0.375% in rate.
Should I drain my savings for a bigger down payment?
No. Always keep 3-6 months of expenses as an emergency fund. Homeownership brings unexpected costs (repairs, maintenance). A smaller down payment with adequate reserves is safer than maxing out your down payment and having no cushion.
Can I use gift money for a down payment?
Yes, most loan types accept gift funds from family members. Conventional loans require a gift letter. FHA allows gifts from family, employers, or charitable organizations. VA and USDA also accept gifts. Some lenders may require you to contribute a portion from your own funds.