"You need 20% down to buy a home" is one of the most persistent myths in American homebuying — and it stops many financially ready buyers from pursuing homeownership years earlier than necessary. This guide breaks down exactly what each down payment level actually costs and saves you, so you can make an informed decision rather than following a rule of thumb that may not apply to your situation.
Anyone trying to decide how much to save before buying — and whether waiting to hit 20% is actually the right financial move.
1. The 20% myth
20% down avoids Private Mortgage Insurance (PMI) on a conventional loan — that's the real reason it became the cultural benchmark. But it is not a legal requirement or a universal necessity. Conventional loans allow as little as 3% down. FHA loans allow 3.5%. VA and USDA loans allow 0% for eligible borrowers.
The real question isn't "can I avoid PMI" — it's "does waiting years to save 20% cost me more than just paying PMI for a while would?" For many buyers, especially in markets where home prices are rising, the answer is no.
2. Down payment levels compared
3. The PMI trade-off
PMI on conventional loans typically costs 0.5% to 1.5% of the loan amount annually, according to the CFPB, divided into monthly payments. Importantly, PMI is not permanent — you have the right to request cancellation once your loan balance reaches 80% of the home's original value, and it's automatically removed at 78% under federal law.
If home prices rise while you save toward 20%, the larger home price can outweigh the PMI you would have paid by buying sooner with a smaller down payment. This is the calculation most "wait until 20%" advice ignores.
4. Bigger down payment vs investing the difference
A larger down payment reduces your loan size and monthly payment, and eliminates PMI at 20%. But it also means more of your savings is tied up in an illiquid asset. Some financially sophisticated buyers choose a smaller down payment and invest the difference elsewhere, accepting PMI as a cost in exchange for liquidity and potential investment growth. This is a personal risk-tolerance decision, not a universally correct answer — and depends heavily on market conditions for both real estate and your alternative investments.
5. Worked example — 5% vs 20% down
5% down: loan amount $332,500. At 6.8%, monthly P&I ≈ $2,170. PMI at 0.8% adds approximately $222/month. Total: approximately $2,392/month.
20% down: loan amount $280,000. At 6.8%, monthly P&I ≈ $1,827. No PMI. Total: approximately $1,827/month.
The 20%-down buyer pays $565/month less. But the 5%-down buyer needed $52,500 less cash upfront and could have purchased years earlier — potentially before further home price appreciation. If home prices in their market rose 8% during the time it would have taken to save the extra $52,500, that delay could have cost considerably more than the PMI paid in the meantime.
There's no universally "correct" choice here — it depends on local market trends, how long it would realistically take to save the larger amount, and personal financial priorities.