What's the Right Size Down Payment When Buying a Home?

Making the right decision about your down payment is crucial.

Buying a house usually requires both putting some money down and securing a mortgage loan to cover the remainder of the cost. But just how large of a down payment should you make when you purchase your property?

This can depend on your situation, so here are a few key things to consider in order to make the choice that's right for you. 

How much are housing costs in your area?

Ideally, it's best to make a 20% down payment if you can afford to do so. A 20% down payment is the "gold standard" preferred by lenders since this is a substantial enough amount of money that it's unlikely lenders would face uncompensated losses if they had to foreclose.

If you can put 20% down, you can avoid being forced by a lender to pay for mortgage insurance that protects them. Mortgage insurance is an added cost you are responsible for, but you get no direct benefit from it. More lenders will also be willing to give you a loan when you make a 20% down payment, and your rate will often be more competitive because the hefty amount you put down reduces the risk to lenders.

However, you need to think about how much housing costs where you live in order to assess the feasibility of a 20% down payment. If you live in an area where the typical house costs $200,000 and you are looking to spend around the average, then coming up with 20% down may not be a huge burden since you'd need only around $40,000. But if a starter home costs $900,000, saving up a $180,000 down payment is much more of a burden. 

What kind of loan are you interested in?

It's generally possible to put as little as 3% down on a home -- or, in some cases, to put nothing down at all if you qualify for special loans such as VA or USDA loans. However, loans with lower down payments can come with higher upfront fees and interest rates.

You should research different kinds of loans, the down payment requirements for each one, and the fees you would need to pay with each type of loan. This will help you decide how big your down payment should be. 

How long would it take you to save up a down payment?

Once you have an idea of how much a down payment would be based on housing costs, and of the minimum down payment required for loans you're interested in, you can estimate how long it would take you to save up different size down payments.

If it would take you just a year or two to save up 20% down, that should ideally be your goal since this will enable you to get an affordable loan while still buying a home in a reasonable amount of time. 

But if it's going to take you many years to save 20% down -- and if you're otherwise in great financial shape to buy -- then you may want to make a smaller down payment so you can get into a home quicker and start building equity and benefitting from property appreciation. 

By thinking about these issues, you can decide what size down payment is right for you and make the best choice about buying a home.