I was talking to a friend about the real estate market recently.  They were tired of renting and couldn’t wait to buy their own home someday. I asked them what was holding them back and they said they want to purchase a home now but didn’t have the 20% for a down payment. It’s something that I have heard many times from buyers over the course of my career.  The 20% down payment myth is still holding a lot of people back from purchasing a home.  I am here to dispel that myth and assure you that many people purchase a home with less than 20% down.  In fact, according to the National Association of Realtors, the average down payment ranges from 6-12%.  There are also loan programs available that require a 0% down payment.

Benefits of a Smaller Down Payment

The average price of a home in Massachusetts in 2021 is $508,000.  A 20% down payment at that price point is almost $102,000.  That is a lot of money for many buyers to have to save and may take some time to do. First-time home buyers are at a further disadvantage because they can’t use equity from a home they already own towards their new down payment.  While buyers wait to save the 20%, they could miss out on some competitively priced homes that perfectly fit their needs. Smaller down payments enable buyers to enter the housing market earlier so they can begin building equity in their property sooner. Lower down payments also allow buyers the ability to set more money aside for things like closing costs and any upgrades they may want to make to the property after closing.

Why a Larger Down Payment Can Help a Buyer

Having a larger down payment has its advantages as well.  With more money down, buyers are financing less.  This means lower monthly mortgage payments and less money paid in interest over the course of the loan.  A down payment of 20% or more also avoids the need to obtain Private Mortgage Insurance (PMI).  According to Nerdwallet, PMI can cost buyers anywhere from .58% to 1.86% of the original loan amount per year until an 80:20 loan-to-value ratio is met. Additionally, when reviewing offers to purchase, sellers often look at how much the buyer is financing.  Many sellers equate less financing with a stronger buyer.  If two similar offers are in front of the seller, the one with less financing may be the one ultimately chosen.

So, How Much Should a Buyer Put Down?

At the end of the day, buyers have to do what is best for them. Every buyer’s situation is different and they need to decide what makes sense for their housing needs and budget. Work with your lender to complete your pre-approval. The lender will consider what the buyer currently has available for a down payment, review different loan programs they qualify for, calculate how much home they can afford and give an estimated monthly mortgage payment.