Mortgage Down Payments — How Low Should You Go?

The traditional mortgage down payment of 20 percent is dying out.

While a 20 percent down payment remains the benchmark that lenders quote most often, most buyers now put down less, NerdWallet reports. The website goes so far as to say the 20 percent down payment “is all but dead — and has been for quite some time, especially for first-time buyers.”

According to the latest monthly figures from the National Association of Realtors, or NAR:

• 54 percent of all buyers who get a mortgage put down less than 20 percent.
• 71 percent of first-time buyers who get a mortgage put down less than 20 percent — including 60 percent who put down only 0 to 6 percent.

Still, many buyers — again, particularly first-time buyers — are unaware of how small of a down payment they need. For example, only 13 percent of buyers under age 35 believe they need a down payment of 5 percent or less, according to NAR.

Advantages of a 20 percent down payment

Just because most folks are getting mortgages with a small down payment doesn’t mean you should join the trend. The traditional 20 percent down payment still brings multiple advantages, which include:

• Avoiding the cost of mortgage insurance: Buyers are typically required to pay for private mortgage insurance if they put down less than 20 percent. So putting down the traditional amount can save you the expense of mortgage insurance. Besides, this type of insurance doesn’t benefit you. Money Talks News founder Stacy Johnson offers the details in “Ask Stacy — When Can I Stop Paying Mortgage Insurance?“
• Smaller monthly mortgage payments: As we note in “Find Your Dream Home — Step by Step,” the more money you bring to the table when buying a home, the more affordable the home purchase becomes. For example, the less money you need to borrow, the smaller your mortgage payments will be.
• More favorable treatment by lenders: NerdWallet notes that putting down 20 percent means lenders will be more likely to compete for your business. It also means you’ll likely get a lower interest rate.

Should you put down less?

Some home shoppers may believe that a smaller down payment is the only way they can afford a home. But shoppers often have more options than they realize.

For example, one way to come up with a bigger down payment is to buy a smaller house. Stacy explains in “Stop and Think: How Much House Can You Really Afford?“:

“One of the dumbest things Americans do is buy the biggest, fanciest things they can possibly afford. And nowhere is this mistake more evident than in home shopping. … if you’re buying simply because you want your piece of the American dream, determine what you need (as opposed to want) and spend as little as possible to get it. There’s no reason to create unnecessary risk by over-leveraging.”

Another way to come up with a bigger down payment is to postpone buying a home. That might be a shrewd move right now anyway, considering that the U.S. housing market is currently a seller’s market, to say the least.

For more ideas, check out “10 Ways to Pull Together the Down Payment for a Home.”

How do you feel about the traditional 20 percent down payment versus smaller down payments? Share your thoughts below or on our Facebook page.