What the Down Payment Actually Changes
The deposit does four separate things, and they are worth keeping apart:
- It reduces the loan, and therefore the monthly payment.
- It decides whether mortgage insurance applies, which is a cliff at 20%, not a slope.
- It affects the interest rate offered — lenders price loan-to-value in tiers.
- It determines how much cash you have left afterwards, which is the part buyers most often get wrong.
The 20% Line and PMI
Private mortgage insurance protects the lender, not you, and costs roughly 0.3% to 1.5% of the loan a year depending on credit score and loan-to-value. On a $360,000 loan at 0.6% that is $180 a month for nothing you receive.
Two facts make PMI less frightening than its reputation. First, on a conventional loan it must be cancelled automatically once the balance reaches 78% of the original price, and can be cancelled on request at 80%. Second, waiting three years to save the difference while prices rise 3% a year usually costs more than the PMI would have.
| Down payment | Loan on $400,000 | P&I at 6.71% | PMI | Monthly total |
|---|---|---|---|---|
| 3% | $388,000 | $2,506 | $194 | $2,700 |
| 5% | $380,000 | $2,455 | $190 | $2,645 |
| 10% | $360,000 | $2,325 | $180 | $2,505 |
| 15% | $340,000 | $2,196 | $170 | $2,366 |
| 20% | $320,000 | $2,067 | none | $2,067 |
Going from 15% to 20% saves $299 a month for $20,000 — an effective return of about 18% a year on that money, which is difficult to beat elsewhere. Going from 3% to 5% saves $55 for $8,000, which is not.
Closing Costs Are Not the Down Payment
Closing costs run 2–5% of the price and are separate cash: lender origination, appraisal, title insurance, escrow deposits for tax and insurance, recording fees, and prepaid interest. On a $400,000 purchase that is $8,000–$20,000 on top of the deposit. The single most common first-time-buyer mistake is saving the deposit exactly and arriving at closing short.
Some of it is negotiable. Seller concessions — the seller paying part of the buyer's costs — are capped by loan type at 3% to 9% of the price, and are ordinary in a slow market.
Low Down Payment Programs
- Conventional 97 — 3% down for qualifying first-time buyers, PMI required.
- FHA — 3.5% down at 580+ credit. The mortgage insurance premium generally lasts the life of the loan unless you put 10% down or refinance out.
- VA — 0% down for eligible veterans and service members, no mortgage insurance, but a one-time funding fee of 1.25–3.3%.
- USDA — 0% down in designated rural areas, with income limits.
Do Not Empty the Account
A house generates expenses immediately: the appliance that fails in month two, the roof issue the inspection understated, the move itself. Keeping three to six months of expenses after closing is worth more than the last two percentage points of deposit. Lenders agree — post-closing reserves are a compensating factor in underwriting.
Frequently Asked Questions
Is 20% down required?
No. It is the threshold that removes PMI, not a requirement. The median first-time buyer in the U.S. puts down closer to 8%.
Can the down payment be a gift?
Yes, from a family member on most loan programs, with a signed gift letter confirming it is not a loan. Lenders will trace the funds, so the money should sit in your account for at least two statement cycles.
Does a bigger down payment lower my interest rate?
Usually a little. Pricing improves in steps at 80%, 75% and 60% loan-to-value; between those points, extra cash changes the payment but not the rate.