Chapter 4: The down payment decision
Ask ten people how much cash you need to buy a house and at least eight will say 20%. The data says otherwise. The median first-time buyer puts about 10% down, conventional loans allow 3% (a few lenders advertise 1%), and the programs in Chapter 5 start at zero. On a $400,000 home, the gap between the folklore and the floor is the gap between saving $80,000 and saving $12,000. That is years of your life, so this chapter treats the down payment as what it really is: a decision with math on both sides, not a rite of passage.
What the down payment actually changes
Your down payment is the cash you bring to closing; the mortgage covers the rest. Lenders describe the split with loan-to-value (LTV), your loan as a percentage of the home's value. Put 10% down and your LTV is 90%.
The size of that cash moves four levers:
- The loan, and therefore the payment. At 6.55% on a 30-year loan, every extra $10,000 down trims about $64 from the monthly principal-and-interest payment.
- Mortgage insurance. Below 20% down on a conventional loan, you pay PMI. The next section takes it apart.
- The rate, a little. Lenders price risk, so a lower LTV can earn a slightly better rate (Chapter 7 covers the full pricing grid).
- Your cushion. Equity on day one is what protects you if prices dip and life forces an early sale. Selling costs roughly 8–10% round trip (Chapter 2), and the down payment is what keeps a forced sale from ending with you writing a check.
The honest case for 20%
The 20% rule did not become folklore by accident, and it deserves a fair hearing. On a $400,000 home at 6.55%:
| Down payment | Cash at closing | Loan | Monthly P&I | PMI |
|---|---|---|---|---|
| 3% | $12,000 | $388,000 | $2,465 | yes |
| 5% | $20,000 | $380,000 | $2,414 | yes |
| 10% | $40,000 | $360,000 | $2,287 | yes, less |
| 20% | $80,000 | $320,000 | $2,033 | none |
Twenty percent buys you no PMI, a payment $381 a month lighter than the 5% buyer's, often a slightly better rate, and a 20% buffer against a price drop. Those are real advantages.
The price of those advantages is $80,000 in cash, before the 2–5% of closing costs ($8,000 to $20,000 on this house), and before the reserves you keep. For many first-time buyers that means five or more extra years of renting and saving. The comparison that matters is the cost of those years against the cost of PMI, and that comparison has a clear shape once you put numbers on it.
PMI, demystified
Private mortgage insurance (PMI) is a policy you pay for that protects the lender if you stop paying. You get no coverage from it. What you get is permission to borrow with less than 20% down. On a $350,000 loan with 5% down it typically runs $140–$220 a month, and your credit score mostly decides where you land in that range.
The part people miss is that PMI ends. Three exits:
- Request removal at 20% equity. Once your balance falls to 80% of the home's original value and your payments are current, you can ask in writing.
- Automatic at 22%. At 78% LTV on the original schedule, the lender must cancel it on their own.
- Refinance or reappraise. If the home's value has risen, many lenders will remove PMI based on a new appraisal, often years before the schedule would get you there.
One warning before the next chapter: this is conventional-loan PMI. FHA loans charge their own mortgage insurance premium (MIP), and with less than 10% down it lasts the life of the loan. Chapters 5 and 6 cover that difference, because it changes the exit plan.
Buy now with PMI, or wait for 20%
This is the real decision, so trace it on the $400,000 house. Assume prices grow about 3% a year, in line with the 3.26% the FHFA measured from Q3 2024 to Q3 2025. That is an assumption, not a promise, and the verdict flips if prices fall.
The buyer who goes now puts 5% down ($20,000), borrows $380,000, and pays $2,414 in principal and interest plus an estimated $195 of PMI: $2,609 before taxes and insurance. Three years later the home is worth about $437,100, the loan balance is down to about $366,500, and her equity is roughly $70,600: the $20,000 she started with, $13,500 of principal paid, and $37,100 of appreciation. At 3% growth, a new appraisal gets her to 20% equity and kills the PMI around year four. Total PMI paid over those four years: roughly $9,500.
The buyer who waits saves toward 20% while renting at $2,200 a month. Three years and $79,200 of rent later, the target has moved: 20% of the now-$437,100 house is $87,400, which is $7,400 more than the $80,000 he originally needed. He has no equity, and the $37,100 of appreciation went to someone else.
At a 3% growth assumption, waiting three years to dodge roughly $9,500 of PMI costs about $37,100 of price plus the rent. The math only points the other way when prices are flat or falling, or when the buy-now payment fails the Chapter 3 budget test. That last condition is not fine print. Buying sooner is only a win when the full payment, PMI included, fits today.
The same-day version of the tradeoff is in the figure: each step up in down payment buys a smaller payment and less PMI, at the price of cash you no longer have. Run your own price, rate, and down payment below; the calculator shows the loan, the PMI estimate, and the full monthly payment for each option.
Buy when the full payment, PMI included, fits the budget you built in Chapter 3, and your emergency fund is still intact after closing. Down payment size is a math problem, not a virtue test.
Keep the tank full
The fastest way to ruin a good purchase is to empty every account hitting a round number. Your reserves after closing matter more than the LTV you closed at. The Personal Finance Guide, Chapter 6, builds the emergency fund in layers, and a home purchase is exactly when those layers earn their keep: Chapter 12 of this guide is full of first-year surprises, and a $5,000 furnace does not care that you proudly avoided PMI.
Some lenders require reserves (a few months of payments in the bank after closing) for certain loans. Hold yourself to that standard even when the lender does not. A 5% down payment with a full emergency fund beats a 10% down payment with an empty one, because the second buyer is one bad month from missing a payment on the house the first buyer still comfortably owns.
Where the money can come from
Plain savings is the cleanest source, and lenders like money that has been sitting in your account for a while (they call funds seasoned once they have been in place about 60 days, because then nothing needs explaining). Three other sources come with rules worth knowing:
Gifts and the gift letter
Lenders allow gift money for a down payment, with paperwork. The giver signs a gift letter stating the money is a gift with no repayment expected, and the transfer itself gets documented (their statement, your statement, the wire). Move the money early so it is seasoned before you apply. A mystery deposit two weeks before closing creates exactly the underwriting delay you do not want.
401(k) loans
Many plans let you borrow from your own balance and repay yourself with interest. The honest costs: the borrowed money sits out of the market while it is in your house, the repayment comes out of every paycheck on top of your new mortgage, and if you leave the job, many plans require fast repayment. Whatever you cannot repay is treated as a withdrawal, which usually means income tax plus a 10% penalty before age 59½. Reasonable for bridging a small gap; a bad tool for stretching to a bigger house.
Maya is buying a $640,000 condo and wants 20% down: $128,000. Her cash savings cover half, and the rest comes from RSUs, using the policy she set in the Personal Finance Guide, Chapter 18: sell at vest. Because she sells shares right as they vest, her cost basis equals the sale price, so the sales add almost nothing to her tax bill. She runs the sales across two vest dates starting four months before her application, parks the proceeds in her high-yield savings account, and lets them season. What she never does is count unvested grants as down payment money. Until shares vest, they are a forecast, and lenders agree.
Where people go wrong
- Waiting years for 20% on principle. While they saved, the median first-timer bought with 10% down and collected the appreciation.
- Draining the emergency fund at closing. The house starts charging for repairs in month one.
- Forgetting closing costs. The down payment is not the only check: add 2–5% of the price (Chapter 11 itemizes every line).
- Mystery money. Unseasoned deposits and undocumented gifts stall underwriting at the worst possible time.
Key takeaways
- The 20% down payment is optional. Conventional minimums start at 3%, and the median first-time buyer puts about 10% down.
- PMI protects the lender, costs roughly $140–$220 a month on a $350,000 loan at 5% down, and ends: by request at 20% equity, automatically at 22%, or early via appreciation and a new appraisal.
- On a $400,000 home growing about 3% a year, waiting three years to avoid roughly $9,500 of PMI costs about $37,100 of price plus three years of rent. The math flips only if prices stall or the payment does not fit today.
- Reserves after closing outrank a rounder down payment. Never empty the emergency fund to dodge PMI.
- Gifts need a letter and a paper trail, 401(k) loans carry job-change risk, and RSU money should be sold at vest and seasoned early.
Sources: CFPB: Buying a House · Down Payment Resource · Bankrate: Current Mortgage Rates · The Finvest Personal Finance Guide