When buying a house, should you consider making a large down payment?

When looking to buy a house, whether you can afford it is always a top consideration. This includes how much of a down payment you want to make on your new home.

Coming up with the cash for a down payment can be a barrier for prospective buyers. In 2019, the average down payment on a house or condo was 12%, according to the National Association of Realtors. For first-time buyers, the number drops to 6%.

However, if you have enough to make the 20% down payment, should you make the standard payment, or is it beneficial for you to put down more?

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How much is a standard down payment on a house?

The standard 20% down payment that most people think of when buying a house is a point of reference. Some buyers save until they have enough to make the standard down payment but having less than 20% won’t prevent you from getting preapproved for a mortgage loan. However, the minimum down payment requirement varies by lender and mortgage program so it’s important to be aware of the terms before picking a mortgage lender.

Borrowers making the standard down payment often have an easier time securing a mortgage. The 20% down payment lowers your loan-to-value (LTV) ratio and the lender would be assuming less risk by financing 80% of the home.

For potential borrowers who cannot afford to make the 20% down payment, lenders will likely view the loan as a riskier investment. Because of this, borrowers are required to take out private mortgage insurance (PMI) when making a down payment that's less than 20% on a conventional mortgage loan. PMI protects the lender if the borrower defaults on the loan and the home goes into foreclosure.

There are some mortgage programs that allow as little as 3% and some don’t require any money down. Here are some options:

• 0% down payment: VA loans for veterans, active duty service members and surviving spouses; USDA loans for those purchasing in rural and some suburban areas
• 3% down payment: The conventional 97 loan, Fannie Mae’s HomeReady mortgage and Freddie Mac’s Home Possible mortgage
• 3.5% down payment: The FHA loan has a minimum down payment of 3.5% and the minimum credit score is 580 to qualify
• Loan programs: Some lenders may only require a 3% down payment with no PMI payment requirements

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Pros and cons of putting a large down payment on a house

Making a larger down payment on a house has its pros and cons. By putting down a larger down payment, borrowers can benefit from:

• A smaller monthly payment: A larger down payment means a smaller loan and lower monthly payments.
• No PMI: Borrowers must pay PMI if they make less than a 20% down payment. Borrowers pay mortgage insurance premiums with FHA-backed loans.
• A better mortgage interest rate: Putting more money down may give you a better interest rate on the loan.
• Lower closing costs: Certain closing costs are linked to the amount of the loan. Smaller loans typically have lower closing costs.
• Starting out with more equity: Home equity can be a long-term strategy for building wealth.
• Paying off the mortgage sooner: Putting down more money can help you to pay off the mortgage loan sooner.

Potential disadvantages of making a larger down payment include:

• It takes a while to save: A 20% down payment on a $250,000 home is $50,000. Saving that much money could take years.
• Drained savings: Putting everything towards a down payment could affect other savings, such as an emergency fund or retirement account contributions.
• Opportunity cost: Mortgage interest rates are currently at all-time lows and borrowers can take mortgage interest deductions on tax returns for the first $750,000 of the mortgage loan. It may be a better idea to make a smaller down payment and invest those funds elsewhere.

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How much should you put down when buying a house?

The amount you pay as your down payment when buying a house depends on your goals and financial situation. Saving for a larger down payment may be worth considering if you prefer to have a lower monthly mortgage bill. Paying too much could mean sacrificing your other savings.

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