Key Takeaways
Down Payment
A down payment is the portion of a home's purchase price you pay upfront in cash, with the remainder financed through a mortgage. It is expressed as a percentage of the purchase price — for example, putting $40,000 down on a $200,000 home represents a 20% down payment. The size of your down payment directly affects your loan amount, interest rate, monthly payment, and whether you'll be required to pay private mortgage insurance.
Lenders use the loan-to-value (LTV) ratio — the loan amount divided by the appraised property value — to assess risk. A lower down payment means a higher LTV, which lenders typically treat as higher risk, often resulting in less favorable loan terms.
How Your Down Payment Changes the Loan Itself
The most immediate effect of your down payment is simple arithmetic: a larger upfront payment reduces the amount you need to borrow. On a $350,000 home, a 5% down payment means financing $332,500, while a 20% down payment drops the loan to $280,000. That $52,500 difference in principal translates into tens of thousands of dollars in interest saved over a 30-year term.
To understand how interest accumulates on a shrinking principal over time, see how a mortgage actually works. The mechanics of amortization mean that early payments are weighted heavily toward interest — so starting with a lower principal has an outsized long-term effect.
13%
Median down payment for all US homebuyers
According to the National Association of Realtors' Profile of Home Buyers and Sellers, the median down payment across all buyers has historically hovered in the low-to-mid teens as a percentage.
8%
Median down payment for first-time buyers
First-time buyers typically put down less than repeat buyers, per NAR data, reflecting the challenge of saving while paying rent.
0.5%–1.5%
Typical annual PMI cost as a share of loan amount
PMI rates vary based on credit score, loan-to-value ratio, and lender policies, according to the Consumer Financial Protection Bureau.
Private Mortgage Insurance: The Hidden Cost of a Small Down Payment
When a borrower puts less than 20% down on a conventional mortgage, lenders typically require private mortgage insurance (PMI) — a monthly premium that protects the lender against default risk. PMI costs generally range from 0.5% to 1.5% of the loan amount per year, depending on your credit score and loan-to-value ratio.
On a $300,000 loan, a 1% PMI rate adds $3,000 annually — or $250 per month — to your housing costs. That premium provides you no direct benefit; it solely protects the lender. Once you accumulate 20% equity in the home, you can request cancellation. Under the Homeowners Protection Act, automatic cancellation is required at 22% equity based on the original amortization schedule.
Track Your Equity to Cancel PMI Sooner
If your home's value rises significantly after purchase, you may be able to request PMI cancellation earlier than your original amortization schedule suggests — but you will generally need a new appraisal to confirm the current value. Contact your loan servicer to understand the specific requirements and documentation needed for an early cancellation request.
The Interest Rate Connection
Down payment size influences the interest rate a lender is willing to offer. Lenders assess the risk that a borrower may default; a smaller down payment means they have less buffer if property values fall. To compensate for that risk, lenders may charge a higher interest rate on high-LTV loans.
The difference may seem small — perhaps 0.25% to 0.5% — but over 30 years on a $300,000 loan, a half-point rate difference can add up to more than $30,000 in additional interest. This is one reason lenders evaluate multiple financial factors together rather than in isolation.
Low Down Payment Programs and When They Make Sense
Not every buyer can — or should — wait to accumulate a 20% down payment. Several federally backed loan programs are designed to make homeownership accessible with less upfront cash:
- FHA loans require as little as 3.5% down for borrowers with qualifying credit scores, though they carry their own mortgage insurance premium (MIP) structure.
- VA loans allow eligible veterans and service members to purchase with no down payment and no PMI requirement.
- USDA loans serve eligible buyers in qualifying rural and suburban areas with zero down payment options.
- Conventional 97 programs allow as little as 3% down for first-time buyers meeting specific criteria.
The trade-off with low down payment programs is typically a higher monthly payment and more total interest over time. For a broader picture of upfront homebuying costs, see how down payments fit alongside earnest money and closing costs.
This article is for general informational and educational purposes only and does not constitute financial, mortgage, or legal advice. Mortgage terms, program eligibility, and requirements vary by lender, loan type, and individual circumstances. Consult a licensed mortgage professional or financial adviser before making decisions about your home purchase.