Can you pay less than 20% as a down payment on a house?

Select’s editorial team works independently to review financial products and write articles that we think our readers will find useful. We earn commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

Making a 20% down payment for the purchase of a house has been the rule of thumb for a very long time, mainly because before 1956 that was what was required of potential buyers. That way, if someone borrowed money from the bank to buy a house but suddenly stopped paying their mortgage, at least the bank would still have the 20% down payment as a sort of insurance policy.

As home values ​​increased over the years, it became apparent that not everyone could afford to pay 20% of the price of a home upfront and in full. Banks, however, were not just going to offer loans to consumers for the full price of the house without protecting themselves from the risk of default.

Subscribe to the Select newsletter!

Our top picks delivered to your inbox. Shopping recommendations that help you improve your life, delivered weekly. register here.

What can I at least deposit for the purchase of a house?

In 1956 the banks decided to change the rules a bit and started allowing homebuyers pay less than 20% as a down payment, with one significant catch – those who did would have to make an additional monthly payment, known as private mortgage insurance, or PMI, which essentially protects the bank in case where home buyers could no longer pay their mortgage.

As a result, today’s consumers are no longer required to put down 20% down on a home. In fact, some mortgage lenders actually allow down payments as low as 3%. For example, the DreaMaker℠ loan from hunting bank allows buyers to pay only 3% of the price of the house, just like the HomeReady loan from Allied bank. Making a 3% down payment for a house that costs $600,000 means you will have to pay $18,000; a 20% down payment for the same house, on the other hand, would cost you $120,000.

hunting bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, FHA Loans, VA Loans, DreaMaker℠ Loans, and Jumbo Loans

  • terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a DreaMaker℠ loan

Advantages

  • The Chase DreaMaker℠ loan allows for a down payment of just under 3%
  • Discounts for existing customers
  • Online support available
  • A number of resources available to first-time home buyers, including mortgage calculators, affordability calculator, training courses and home consultants

The inconvenients

  • Does not offer USDA loans or HELOCs
  • Existing customer discounts apply to those with large balances in their Chase deposit and investment accounts

Allied bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, HomeReady Loan and Jumbo Loans

  • terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a HomeReady loan

Advantages

  • The Ally HomeReady loan allows a down payment of just under 3%
  • Pre-approval in just three minutes
  • Submission of the application in less than 15 minutes
  • Online support available
  • Existing Ally customers are eligible for a discount that applies to closing costs
  • Does not charge lender fees

The inconvenients

  • Does not offer FHA, USDA, VA or HELOCs loans
  • Mortgages are not available in Hawaii, Nevada, New Hampshire or New York

As you can see, there’s a huge advantage to paying less than 20% upfront. You would be able to save faster for a lower down payment, allowing you to become a homeowner sooner. The extra money you would have used for your down payment could also be redirected to other expenses such as closing costs, inspections, renovations or moving materials.

As great as that sounds, there are still ramifications to consider if you decide to put less than 20% less. Remember that private mortgage insurance payment we talked about earlier? This provision has remained in effect ever since, so you will need to pay these monthly payments on top of your regular mortgage payments if you decide to go this route.

Keep in mind, however, that private mortgage insurance applies to conventional loans. If you take out a loan from the Federal Housing Administration, or FHA, and pay less than 20%, you’ll still have to pay for private mortgage insurance each month, but it’s called a mortgage insurance premium, or MIP, instead. of PMI.

It’s also important to keep in mind that the lower your down payment, the more interest you’ll pay over the life of the loan. For example, if you bought a house for $500,000 with a 20% down payment and a mortgage with a fixed APR of 5%, you would pay $373,158 in interest over 30 years. However, if you were to buy that same house with just a 3% down payment, you would pay $452,566 in interest over 30 years, plus the PMI price.

How much does private mortgage insurance cost?

According to RocketMortgage, private mortgage insurance can cost between 0.5% and 1% of your loan amount per year. Let’s say you take out a $500,000 loan, you might end up paying between $2,500 and $5,000 a year in private mortgage insurance, but your payments would be staggered over the year. This could be between $208 and $416 per month, added to your other monthly household expenses.

It’s important to note, however, that you won’t be stuck paying for private mortgage insurance forever, as you can usually waive that monthly payment once you’ve paid off enough of your mortgage to build up a 20% equity interest in the mortgage. your house.

At the end of the line

While it’s possible to put down less than 20% on a home, you’ll need to make monthly private mortgage insurance payments on top of your regular mortgage. However, these insurance payments can potentially be canceled once you have accumulated 20% of the equity in your home. Since a lower down payment can help expedite a person’s homeownership, for some potential buyers, the extra expense may be worth it.

Check out Select’s in-depth coverage at personal finance, technology and tools, welfare and more, and follow us on Facebook, instagram and Twitter to stay up to date.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

About Matthew R. Dailey

Check Also

House prices are skyrocketing. 4 ways to increase your down payment funds

Image source: Getty Images Here’s how to scrounge up the extra cash you need for …