Here’s What Happens When You Put Down Less Than 20% on a Home

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Not putting down 20% on a conventional mortgage could cost you in other ways. Read on to learn about the additional costs you could face. 

When you take out a mortgage, you’re generally required to make a down payment on your home (though some loan programs, like VA loans, allow for a 0% down payment). The amount you’re required to put down on a home can vary by mortgage lender. Some lenders might accept a 5% down payment on a conventional home loan, while others might require 10%.

But if you’re taking out a conventional mortgage, it’s generally in your best interest to try to put down 20% of your home’s purchase price at closing. If not, you could get stuck paying private mortgage insurance, or PMI.

An added expense you probably don’t want

PMI might sound like something designed to protect you. But don’t be fooled — the purpose of PMI is to protect your lender in case you don’t make your mortgage payments when you’re supposed to.

PMI comes into play when you don’t make a 20% down payment when you close on your home. And Experian says that PMI generally costs between 0.2% to 2% of your mortgage amount per year, but that it can also sometimes be higher.

So let’s say you’re borrowing $200,000 to buy a home. If you’re looking at 1% PMI, that means you’re paying $2,000 a year, or about $167 a month extra to own your home. If you’re looking at 2% PMI, it means you’re looking at $4,000 a year, or an extra $333 a month.

And remember, that expense is on top of the other expenses you’ll face as a homeowner, from property taxes to homeowners insurance. So if you can avoid PMI, you may find that homeownership is far more affordable for you.

How to avoid PMI

If you want to avoid paying PMI, you’ll need to come up with 20% of your home’s purchase price in time for your mortgage closing. It’s really that simple. To do that, you may need to delay homeownership a few extra years until you have more funds socked away for a down payment. But going this route could help you avoid a costly monthly expense.

Now if you don’t want to wait to purchase a home and you don’t have a 20% down payment, you could make a smaller down payment, deal with PMI for a bit of time, but aim to put extra money into your mortgage month after month to get rid of PMI as quickly as you can. You can contact your lender and ask to have your PMI canceled once the principal balance of your mortgage is equal to 80% of the original purchase price of your home.

So, let’s say you bought a $250,000 home and only put down 10%, or $25,000. That means you’ll be liable for PMI until you’ve chipped away at another $25,000 worth of mortgage principal, bringing that balance down to $200,000.

All told, PMI is something many homeowners resign themselves to. But if you want to avoid it, wait until you have a 20% down payment to move forward with a home purchase.

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