The Cash Allocation Trade-Off
Cash allocation trade-offs between down payment and closing costs
| Priority | Benefit | Cost |
|---|---|---|
| More down payment | Lower PMI, better rate, more equity | Less cash available for reserves |
| Less down payment, more reserves | Better financial buffer for emergencies | Higher PMI, slightly higher rate |
| Zero closing costs (seller concession) | Keep more cash | Higher purchase price or less credit for negotiations |
| Lender credit for closing costs | Less cash at closing | Higher interest rate for life of loan |
Never deplete your emergency fund to make a larger down payment or cover closing costs. A homeowner who exhausts savings at closing is one unexpected expense away from missing mortgage payments. Minimum after closing: 3 months of housing costs ($5,000–$8,000 on a $300K–$400K home) in liquid savings.
The PMI vs. Closing Cost Math
Scenario: $360,000 purchase, $54,000 available cash ($15% of price). Option A: 15% down ($54,000 = all to down payment). Closing costs: zero (need seller concession). PMI: minimal. Option B: 10% down ($36,000), $18,000 for closing costs, no seller concession needed. PMI: $150/month until 20% equity (~4 years): total PMI cost $7,200. Option A saves $7,200 in PMI but requires negotiating zero cash closing costs.
When Seller Concessions Change the Equation
In a buyer’s market, negotiating 2–3% seller concessions ($7,200–$10,800 on $360K) effectively covers closing costs — freeing your cash entirely for down payment and reserves. This is often the optimal strategy: negotiate seller concessions instead of choosing between down payment and closing costs.
Calculate Closing Costs to Plan Your Cash Allocation
Know the exact closing cost number before deciding how to split available funds.