Should you put 20% down on a house?
Worked examples computed with the same calculations as our calculators.
Short answer
Not necessarily. Putting 20% down avoids PMI, but the bigger question is whether the cash you keep would earn more invested than it saves you by paying down a 6.5% mortgage. In our example, with a 6% investment return, putting more down kept winning, and a smaller down payment only pulls ahead if investments earn more than 8.63% a year. At an 8% return, exactly 20% did best.
The example is worked through below with the same math as our down payment calculator.
What PMI actually costs
With less than 20% down on a conventional loan, lenders charge private mortgage insurance (PMI). It protects the lender, not you. In our example ($500,000 home, PMI at 1% of the loan a year):
- 5% down: $396 a month for 48 months, $18,561 in total
- 10% down: $375 a month for 33 months, $12,186 in total
PMI drops off once your loan falls to 80% of the home's value, which happens sooner when the home's value rises. So it's a cost for a few years, not for the life of the loan.
Why 20% is a cliff
PMI is charged on the whole loan, so the last bit of down payment before 20% saves far more than any other. In the example, going from 19% to 20% down costs $5,000 more at closing and lowers the monthly cost from $3,900 to $3,531: $369 a month. If you're just short of 20%, closing that gap is usually the best use of the money.
The example
A $500,000 home, 6.5% fixed rate, 30-year loan, $10,000 closing costs, sold after 10 years, with home prices growing 3% a year. To compare the options fairly, each one gets the same budget: whatever an option doesn't spend, at closing or each month, is invested at 6% a year (gains taxed at 15%). The last column is each option's net worth when you sell, compared with the best option.
| Down payment | Monthly cost | Cash at closing | After 10 years |
|---|---|---|---|
| 3% (PMI) | $4,472 | $25,000 | $38,574 behind |
| 5% (PMI) | $4,401 | $35,000 | $36,182 behind |
| 10% (PMI) | $4,222 | $60,000 | $28,501 behind |
| 15% (PMI) | $4,043 | $85,000 | $18,225 behind |
| 19% (PMI) | $3,900 | $105,000 | $7,926 behind |
| 20% | $3,531 | $110,000 | $5,659 behind |
| 25% | $3,373 | $135,000 | $2,830 behind |
| 30% | $3,215 | $160,000 | Best |
Here, every extra dollar down paid off. Paying down a 6.5% loan is a guaranteed 6.5% return, which beats a 6% return that's also taxed. Even so, the gap between the least and the most down was $38,574 over 10 years. That's real money, but not enough to justify emptying your savings.
When a smaller down payment wins
The answer flips when investments earn enough more than the mortgage costs. In this example, that's above 8.63% a year. At an 8% return, PMI makes exactly 20% the sweet spot:
| Down payment | Monthly cost | Cash at closing | After 10 years |
|---|---|---|---|
| 3% (PMI) | $4,472 | $25,000 | $16,559 behind |
| 5% (PMI) | $4,401 | $35,000 | $16,370 behind |
| 10% (PMI) | $4,222 | $60,000 | $13,927 behind |
| 15% (PMI) | $4,043 | $85,000 | $8,424 behind |
| 19% (PMI) | $3,900 | $105,000 | $1,415 behind |
| 20% | $3,531 | $110,000 | Best |
| 25% | $3,373 | $135,000 | $3,100 behind |
| 30% | $3,215 | $160,000 | $6,201 behind |
Below 20%, PMI costs more than investing the cash earns. Above 20%, there's no PMI left to avoid, and the cash earns more invested than paying down the loan saves.
How sure is the answer?
Investment returns swing a lot from year to year, so we reran the 6% example across 300 simulated futures. The most down (30%) came out best in 64% of them, the least down (3%) in 21%, and exactly 20% in 15%. Nothing in between ever won. Overall, the most down beat the least down in 74% of futures. So the real choice is usually between the minimum, exactly 20%, and as much as you can comfortably afford.
What matters more than the math
- Keep your emergency fund. Money in the house is hard to get back out. A bigger down payment isn't worth it if a job loss or a repair would leave you short.
- Your loan type changes the minimum. FHA loans need 3.5% down but charge mortgage insurance for longer; VA loans allow 0% down with a one-time funding fee. The calculator handles both.
- Rates can depend on your down payment. Lenders sometimes offer a better rate with more down, which this example doesn't include. Compare real quotes.
- See how the numbers work for the full set of assumptions.
Try it with your own price, rate, and investment return, and set the cash you have available. It starts from this example.
Open the down payment calculator