Should You Put 20% Down On Your Mortgage?

62% of people believe that you must put a 20% downpayment on your home in order to purchase it according to NerdWallet.

In reality, the required downpayment depends on the type of loan as well as the lender's own criteria. In fact, most homebuyers actually put less than 20% down. The National Association of Realtors' in fact cited that only 46% of buyers did in all of 2020.

With conventional loans, lenders may allow as low as 3% for qualified buyers. There are even 0% programs using downpayment assistance programs to cover the initial 3%. FHA loans require 3.5% and VA loans generally don't require any downpayment.

What happens if I don't put 20% down?

In essence, you'll pay more each month. Plus, many lenders may not approve the loan without it for investment properties, which have a different set of criteria compared to personal properties.

This is because of paying for Private Mortgage Insurance, or PMI. Private mortgage insurance is an extra fee that a bank will charge you to pay for insurance that protects themselves against you not being able to pay back your loan.

Paying for PMI can either be paid upfront during the closing process or added to your monthly expenses depending on the lender's standards. On average, PMI costs about $30 to $150 per month for every $100,000 owed on a loan according to Freddie Mac.

This means that for a $200,000 house, you may end up paying $300 per month extra for PMI, which might be the entire cash flow on a property.

Note: PMI is generally terminated once you reach 20% in equity in the property, so you're not stuck with it for the life of the loan.

Moreover, let's say you put down 5% instead of 20% on a $200,000 home. On the 5% downpayment, you'll need to borrow $190,000 versus borrowing $160,000 on the 20% downpayment. This means that you'll inevitably pay more per month since your loan balance is higher.

To give you clear numbers, putting a 5% downpayment on a $200,000 home will mean your monthly principal and interest payment will be $798 at a 2.98% interest rate. In comparison, on a 20% downpayment on the same home, the monthly principal and interest payment will be $672.

That's a $126 difference per month. Again, that may be the entire cash flow on a property.

So all in, putting 5% down on the property versus 20% down means that your monthly payment may be an extra $426 per month on your $200,000 property for the loan balance and PMI.

Note: Lenders generally won't approve low downpayments on investment properties. See below for more explanation!

So...Should you put down 20%?

As unsatisfying this answer is, it depends.

For some people, putting 20% down makes more sense. You get to avoid PMI and capitalize on having a lower monthly payment. For an investment property, this means that you'll experience the best cash flow each month.

Generally, lenders will not allow less than 15% down on an investment property because Fannie Mae's minimum lending standard is set at 15% for single-family properties. While this is just Fannie Mae's standard, most lenders generally will conform to this rule. Some lenders will even require upwards of 25% for a downpayment on investment properties.

Also note, the 20% downpayment standard was created for a reason — it's safer for both the lender and borrower in the sense that most borrowers are more likely to pay back the entire loan if they have a 20% stake in the home. There are various financial factors that discuss this topic, but it's due to a host of reasons. It's generally seen as "good financial sense" to put 20% down.

However, 20% on a 200,000 home is $40,000. And the millennial generation has to pay for and deal with student loan debt, credit cards, and other forms of debt that may make it difficult to save a large sum of money.

In these scenarios, it may make sense to pay for the higher monthly payment and PMI in order to begin your homeownership. The downside is that you'll likely not cash flow on an investment property. In fact, you may end up paying monthly to cover the difference from rental income to the monthly payment cost.

Moreover, if putting a 20% downpayment is likely to leave you at significant financial stress, not allow you to budget for expenses like maintenance, or doesn't leave you enough money for closing costs, it may be worth looking into lower downpayment options.