Making a 20% down payment for a home purchase has been the rule of thumb for a very long time, mostly because prior to 1956, that's what was required of potential homebuyers. That way, if someone borrowed money from the bank to purchase a house but suddenly stopped paying their mortgage, at least the bank would still have the 20% down payment as an insurance policy of sorts.
As home values increased over the years, it became evident that not everyone could afford to pay 20% of the price of a house upfront and in full. Banks, however, weren't just going to offer consumers loans for the home's full price without protecting themselves from the risk of defaulting payments.
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What is the least I can put down for a home purchase?
By 1956, the banks decided to change the rules a bit and began allowing homebuyers to pay less than 20% as a down payment, with one important catch — those who did this would need to make an additional monthly payment, known as private mortgage insurance, or PMI, which essentially protects the bank in the event homebuyers can no longer pay their home loans.
As a result, consumers today are no longer required to put 20% down for a house — in fact, some mortgage lenders actually allow down payments as low as 3%. For example, the DreaMaker℠ loan from Chase Bank lets homebuyers put down just 3% of the home's price, as does the HomeReady loan from Ally Bank. Making a 3% down payment for a home that costs $600,000 means you'd need to pay $18,000; a 20% down payment for the same house, on the other hand, would run you $120,000.
- Existing Chase customers can get a rate reduction
- Above-average customer satisfaction scores, meaning you're likely to get stellar service and customer service pros who are ready to answer your questions and guide you through the process
- Closing timeline guarantee so you won't have to worry about whether or not you'll close on time.
- Homebuyer grants of up to $7,500, a huge cash infusion that homebuyers can put towards closing costs and down payments.
- The Chase DreaMaker℠ loan only requires 3% down payment for qualifying homebuyers, lower than the typical 5% minimum required for a conventional mortgage, making it a great option for those who haven't saved much for a down payment.
- No USDA loans or HELOCs
- No closing guarantee for refinancing
- Chase homebuyer grant only available in select areas.
Ally Home
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional, jumbo, HomeReady
Terms
15 – 30 years
Credit needed
620
Minimum down payment
5% for conventional loan, 3% for HomeReady loan
Terms apply.
Read our Ally Bank mortgage review
Pros
- No lender fees
- Preapproval in as little as three minutes
- Available in all 50 states
- HomeReady loan only requires a 3% down payment
Cons
- No FHA, USDA or VA loans
- No home equity lines of credit (HELOC)
- No physical branches
As you can see, there's a huge advantage to paying less than 20% upfront. You'd be able to save up for a lower down payment quicker, which would allow you to become a homeowner sooner. The extra money that you would have used for your down payment could also be redirected toward other expenses such as closing costs, inspections, renovations or moving materials.
As great as this may sound, there are still some ramifications to be aware of if you decided to put less than 20% down. Remember that private mortgage insurance payment we mentioned earlier? That provision has stuck around ever since, so you'll need to pay those monthly in addition to your regular mortgage payments should you decide to go down this road.
Keep in mind, though, that private mortgage insurance applies to conventional loans. If you're taking out a Federal Housing Administration, or FHA, loan and putting down less than 20%, you'll still need to pay private mortgage insurance each month, but it'll be called a mortgage insurance premium, or MIP, instead of PMI.
It's also important to keep in mind that the lower your down payment, the more you'll pay in interest charges over the life of a loan. For instance, if you were purchasing a $500,000 home with a 20% down payment and a mortgage with a fixed APR of 5%, you'd pay $373,158 in interest over 30 years. However, if you were to purchase that same home with just 3% down, you'd pay $452,566 in interest over 30 years, plus the price of PMI.
How much does private mortgage insurance cost?
According to RocketMortgage, private mortgage insurance can cost anywhere from 0.5% to 1% of your loan amount per year. Let's say you take out a $500,000 loan, you could end up paying between $2,500 and $5,000 per year in private mortgage insurance, but your payments would be broken up over the course of the year. This could amount to anywhere from $208 to $416 per month being tacked onto your other monthly household expenses.
It's important to note, though, that you won't be stuck paying private mortgage insurance forever, as you can usually have this monthly payment waived once you've paid enough of your mortgage to build up a 20% equity stake in your home.
Bottom line
While it's possible to make a down payment on a home that's less than 20%, you'll need to make monthly private mortgage insurance payments on top of your regular mortgage. However, these insurance payments can eventually be waived once you've built up 20% equity in your home. Considering a lower down payment can help fast-track a person's goal of homeownership, for some potential homebuyers, the additional expense may be worth it.
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