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Is It Necessary To Put a 20 Percent Down Payment To Buy a House?

According to a 2023 report, the median down payment for all U.S. homebuyers is 14 percent of the purchase price, not 20. The times are changing, and in this brief journey, we’ll explore the myths surrounding down payments. We’ll explore why the conventional wisdom of 20 percent may not be as popular as it once seemed.

What is a down payment?

A down payment is an upfront payment a buyer makes on a large-ticket item, usually a car or a house. When the deal is closed, it’s paid in cash or by another method, representing a portion of the purchase price. 

A down payment is intended to lower the amount that must be borrowed through a loan and to show the buyer’s commitment to the purchase.

Suppose you want to buy a $300,000 home. The traditional down payment would be $60,000. That’s a substantial sum that may be out of reach for many prospective buyers. This requirement has deterred countless individuals and families from entering the real estate market.

Do you have to put 20 percent down on a house?

The answer is no!

While a 20 percent down payment has been a traditional benchmark, various financing options allow buyers to put down a smaller percentage or even no down payment. Here are some alternatives to the 20 percent down payment:

  • Conventional loans with smaller down payments: Some mortgage programs also offer down payment options as low as three percent. They allow buyers to enter the market with a smaller upfront payment, securing a mortgage loan from a bank.
  • USDA (U.S. Department of Agriculture) loans: The USDA offers loans with no required down payment for qualified properties in designated rural areas. 
  • Down payment assistance programs: Various government and nonprofit institutions provide low-interest loans or grants to assist purchasers in covering a portion of their down payment.

However, while the allure of a no down payment option may be tempting, opting for a down payment, even a modest one, is a wise financial decision that can significantly impact your monthly payments and, consequently, your overall savings.

For example, your dream home has a price of $350,000 and an interest rate of 4.5 percent:

  • With a robust down payment of 20 percent, your monthly payment comes to $1,424
  • Opting for a five percent down payment increases your monthly commitment to $1,654
  • If you choose to forgo a down payment altogether, your monthly payment climbs to $1,778

Beyond the immediate monthly savings, the long-term financial impact is noteworthy. Over 30 years, by committing to a 20 percent down payment, you stand to save over $52,000 in interest compared to no down payment.

While a 20 percent down payment is not necessary in today’s real estate landscape, it remains a wise financial move, even if it’s not at the traditional threshold. A down payment, whether modest or substantial, can lead to reduced monthly payments and long-term interest savings. So, if you can manage a down payment, it’s a prudent step toward realizing your homeownership goals.