3 Pitfalls of Making a Smaller Down Payment on a Home

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Want to keep your down payment as low as possible? Read on to see why that may not be a good idea. 

The amount of money you’re required to put down on your home purchase during your closing will depend on your mortgage lender. A 2022 survey by the National Association of Realtors found that 35% of consumers thought they’d need 16% to 20% for a down payment. But many lenders will accept a 10% down payment, and others might agree to even less.

If you’re looking to buy a home, you may be inclined to keep your down payment to a minimum. That way, you’ll have more funds available for things like moving costs, furniture, and home renovations once you move in.

But making a smaller down payment on a home has its drawbacks. Here are a few you should know about.

1. Your monthly mortgage payments will be higher

The less money you put down on your home, the higher you can expect your monthly mortgage payments to be. Higher payments could put a strain on your budget, so that’s something to consider when determining what down payment to make.

2. You might get stuck paying private mortgage insurance

If you take out a conventional mortgage and don’t put 20% down at closing, you’ll be hit with private mortgage insurance, or PMI. That might sound like something that benefits you, but it isn’t.

Rather, PMI is a premium that’s usually tacked onto your monthly mortgage payments, and its purpose is to protect your lender (not you) in case you fall behind on your payments. The cost of PMI is generally 0.5% to 1% of your loan amount, so it’s not insignificant. For a $300,000 mortgage, 1% PMI leaves you paying an extra $250 a month. So all told, a smaller down payment could cost you more money in the form of PMI.

3. It might take you a really long time to build equity

The less money you put down on a home initially, the longer it’s going to take you to build up equity. Home equity is measured as the difference between your home’s market value and your mortgage balance. Having more of it is a good thing, since you can borrow against it as needed. And also, if you’re forced to sell your home suddenly (say, to move for a job), having more equity puts you in a better position.

How much should you put down on a home purchase?

The amount of money you decide to put down on your home should hinge on:

How much cash reserves you haveHow much your lender insists onHow much you’re expecting to spend on things like home repairs

If you can get to the 20% mark for your down payment, you’ll avoid PMI, and there’s a lot of benefit to doing that. But if you can’t manage a 20% down payment, don’t sweat it. Just don’t automatically assume that you’re best off putting down the lowest amount your lender will accept. You may be able to get away with a 5% down payment. But putting down 10% might better work to your benefit.

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