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The Numbers: $400,000 Home at 7% Interest Rate
| Down Payment | Upfront Cash | Loan Amount | P&I | PMI/mo | Total PITI* |
|---|---|---|---|---|---|
| 3% ($12,000) | ~$23,600 | $388,000 | $2,581 | $388 | ~$3,477 |
| 5% ($20,000) | ~$31,600 | $380,000 | $2,528 | $285 | ~$3,421 |
| 10% ($40,000) | ~$51,600 | $360,000 | $2,395 | $144 | ~$3,147 |
| 20% ($80,000) | ~$89,600 | $320,000 | $2,129 | $0 | ~$2,737 |
*Includes estimated taxes ($367/mo) and insurance ($150/mo). PMI rates estimated at 1.2% (3%), 0.9% (5%), 0.48% (10%) of loan balance annually.
The 3% Option: Maximum Accessibility
FHA loans (3.5%) and conventional programs like Fannie Mae HomeReady and Freddie Mac Home Possible (3%) allow buyers into the market with minimal upfront cash. The trade-off: higher PMI costs that persist until 20% equity is reached.
FHA vs. Conventional at 3%: FHA is more accessible (lower credit scores accepted, higher DTI allowed) but comes with lifetime mortgage insurance for most borrowers. Conventional 3% programs typically require better credit (640+) but PMI cancels automatically at 78% LTV. Unless you specifically need FHA's credit flexibility, conventional 3% is often the better long-term choice because PMI eventually disappears.
The critical risk: depleting emergency savings to get to 3% down. Buying a home with no cash reserve and the minimum down payment is financially precarious. One major repair — $10,000 HVAC, $15,000 roof — and you're in serious trouble. Most financial advisors recommend 3–6 months of expenses in savings beyond the down payment and closing costs.
The 5–10% Option: The Practical Sweet Spot
For most first-time buyers who aren't near 20%, 5%–10% is the practical sweet spot. PMI costs drop significantly versus 3%, and the cash required is achievable for many buyers in reasonable timeframes. The 5% conventional loan allows PMI cancellation once you reach 20% equity — typically 7–10 years at standard appreciation rates.
At 10% down, PMI is significantly reduced (often under $150/month) and you have meaningful equity from day one, reducing the risk of being underwater if the market softens.
The 20% Option: No PMI, Maximum Financial Strength
The 20% down payment eliminates PMI entirely, reduces your loan balance (and thus interest costs), and makes you the strongest possible buyer in a competitive market. On a $400,000 home, no PMI saves $144–$388/month depending on down payment — over $50,000 over the first 15 years of the loan.
The cost of waiting for 20%: in high-appreciation markets (5%+ annual gains), a $400,000 home bought today may cost $500,000 in 3 years. The appreciation you miss waiting to save an extra $60,000 (from 5% to 20% down) can exceed the PMI costs over the same period. Do the math for your specific market before assuming 20% down is always better.
The Opportunity Cost Argument for Less Down
If your mortgage rate is 7% and the stock market returns 10% annually, keeping more cash invested (by putting less down) theoretically earns 3% excess return on the difference. But this argument only holds if you actually invest the retained cash (many don't), your investment returns exceed the mortgage rate (not guaranteed), and you can sustain the higher monthly payment without stress (often underestimated). For most buyers, the simplicity of eliminating PMI at 20% wins over the theoretical arbitrage.
For the full first-time buying process, read our first-time home buyer guide. To understand how your credit score affects the rate and what improvements are possible, see how to get the best mortgage rate.
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Frequently Asked Questions
Do I need 20% down to buy a house?
No. The 20% threshold eliminates PMI, but many programs allow 3%–5% down. FHA requires 3.5%, conventional programs allow 3%, VA and USDA offer 0% down. The 20% myth persists because it's the PMI elimination threshold, not a requirement.
What is the minimum down payment for a house?
Conventional: 3%. FHA: 3.5% (credit 580+) or 10% (credit 500–579). VA: 0% for veterans. USDA: 0% for eligible rural areas. Jumbo loans: typically 10%–20%+.
How much does PMI cost?
PMI costs 0.5%–1.5% of the loan balance annually, depending on down payment and credit score. On a $380,000 loan with 5% down, PMI typically runs $190–$285/month. PMI is removed when equity reaches 20% (request cancellation) or automatically at 78% LTV based on scheduled payments.
Should I put more or less down?
More down: lower monthly payment, no PMI at 20%+, lower total interest, stronger equity position. Less down: preserve cash for emergency fund and investments, buy sooner in rising markets. Don't drain emergency savings to maximize the down payment — financial stability after closing is more important than minimizing PMI.
Can I avoid PMI without 20% down?
Yes, with piggyback loans (80/10/10 structure: 80% first mortgage, 10% second mortgage, 10% down) or lender-paid PMI (higher rate, no separate PMI charge). Some credit unions offer no-PMI mortgages at lower down payments. Compare the total cost of each approach — lender-paid PMI at a higher rate can cost more long-term than regular PMI that cancels.