Housing prices are up, but homebuyers can soften the blow with a smaller down payment

Housing costs have reached a record high, according to new data released Tuesday from the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. In September 2023, home prices rose 3.9% year-over-year, up from the 2.5% annual increase observed in August.

Is this cause for concern? When home sales decline, as they have given the high mortgage rate environment, analysts tend to expect home prices to fall. That's not the case in today's market, however, since housing supply is also low. Homeowners who've locked in low mortgage rates are staying put, leaving prospective buyers with a limited inventory of pricey properties to choose from.

Though this latest report could make it seem like the dream of affording a house is even further away, CNBC Select has some advice on making it real.

While you can't control the housing supply and your primed credit score can only go so far in a high-rate climate, you could lessen how big of a hit that costly home price makes on your finances by putting down a smaller down payment.

It's a misconception you have to put down 20% on a home. In fact, 8% is the typical down payment for first-time homebuyers, according to the National Association of Realtors' 2023 Profile of Home Buyers and Sellers.

There are even mortgage lenders for making a small down payment — as low as 3%. Chase's DreaMaker℠ loan and Ally Bank's HomeReady loan both allow homebuyers to put down just 3% of the home's price. Consider the average U.S. home sales price of $513,400 (as of Q3 2023); making a 20% down payment on this home would cost you $102,680 while making a 3% down payment would run you $15,402.

Making a smaller down payment — typically one less than 20% — usually comes with a catch: Borrowers have to take out private mortgage insurance (PMI), which is basically protection for the bank in the event you can't pay your mortgage.

Since PMI is a type of insurance, the rates change daily. But it can cost a homeowner anywhere from 0.2% to 2% of their loan amount each year, according to RocketMortgage. PMI payments are broken up over the course of the year, so it'll act as another monthly bill, along with your mortgage, and any insurance premiums or tax payments.

The good news is your monthly PMI payments can be waived once you've paid enough of your mortgage to build up a 20% equity stake in your house.

The even better news? Citi's HomeRun Mortgage program allows down payments as low as 3% and it doesn't require PMI.

With a smaller down payment, you'll naturally pay more in interest than if you had paid more upfront, since interest is accruing on a larger loan balance.

We're in a tough housing market, but those eager to buy may want to consider a smaller down payment to get them in the door.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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