Down Payment Effect
Larger down payment → smaller loan → smaller P&I
On a $400,000 house, the difference between 5% down and 20% down is $60,000 of cash and about $379 a month, plus mortgage insurance that only one of those scenarios carries. Working through the actual numbers usually changes how people think about waiting.
Three versions of the same house
At 5% down you borrow $380,000, which at 6.5% over 30 years is about $2,402 a month. At 10% down the loan is $360,000 and the payment is about $2,275.
At 20% down you borrow $320,000 and the payment falls to about $2,023. Same house, same rate, same term.
Each additional 5% of down payment removes roughly $126 a month from the P&I. That is a straightforward linear relationship — the loan is just smaller.
The mortgage insurance cliff at 20%
Below 20% down, conventional loans require private mortgage insurance, typically 0.5% to 1.5% of the loan annually. On a $380,000 loan that is $158 to $475 a month.
PMI protects the lender, not you, and it buys you nothing. It is the price of getting into the house with less cash.
That means the real gap between 5% down and 20% down on this house is closer to $550 a month once PMI is included, not $379.
- 5% down: $380,000 loan, about $2,402 a month, plus PMI.
- 10% down: $360,000 loan, about $2,275 a month, plus PMI.
- 20% down: $320,000 loan, about $2,023 a month, no PMI.
- Each 5% of down payment is roughly $126 of monthly P&I.
- PMI can usually be removed once you reach 20% equity.
Why waiting for 20% is not always right
Saving another $40,000 takes most households two to four years. During that time home prices may rise, rents are paid to someone else, and the target moves.
PMI is also not permanent. On conventional loans you can request removal at 20% equity and it drops automatically at 22%, which often arrives sooner than expected if prices rise.
The honest comparison is between buying now with PMI and buying later at whatever the market looks like then. Nobody knows the second half of that, which argues for not treating 20% as a rule.
Where the money comes from matters too
A down payment pulled from a retirement account through a withdrawal can trigger taxes and penalties that quietly add thousands to the real cost of the house.
Cash gifts from family are allowed by most loan programs, but lenders require documentation showing the money was a gift rather than an undisclosed loan.
Money that arrives in your account shortly before applying will be questioned, so large transfers are best completed a few months ahead of the process.
Selling investments for a down payment can also create a tax bill in the same year you are buying, which is worth calculating before you count that money as available.
What the down payment should not do
It should not consume your emergency fund. Closing with zero reserves means the first significant repair goes on a credit card, which undoes the benefit of the larger down payment several times over.
It also should not ignore closing costs, which typically run 2% to 5% of the purchase price. On a $400,000 house that is $8,000 to $20,000 due at the same time.
Work backward from what you can put down while keeping three months of expenses in cash. That constraint produces a more durable answer than any percentage target.
Loan type changes the rules
Conventional loans go as low as 3% down for qualified buyers, with PMI that can be removed once you reach 20% equity.
FHA loans allow 3.5% down with more forgiving credit requirements, but the mortgage insurance premium generally lasts the life of the loan unless you refinance out of it. That distinction is worth several thousand dollars.
VA loans for eligible service members and veterans require no down payment and carry no monthly mortgage insurance at all, though there is a one-time funding fee. If you qualify, the arithmetic above changes completely.
Try these inputs
- 5% down: $380,000 loan, 6.5%, 30 years
- 10% down: $360,000 loan, 6.5%, 30 years
- 20% down: $320,000 loan, 6.5%, 30 years