Overview
Down payment decisions involve tradeoffs: larger down payments reduce monthly payments and eliminate PMI, but tie up capital that could be invested. Smaller down payments preserve cash but add PMI and mean higher monthly payments. Understanding the exact math of each scenario helps you choose the optimal down payment for your financial situation.
Down payment impact on monthly payment -- $350,000 home, 7% rate
| Down Payment | On $350,000 Home | Loan Amount | Monthly P&I (7%) | PMI (est. 0.8%) | Total Monthly Payment |
|---|---|---|---|---|---|
| 3% ($10,500) | $10,500 down | $339,500 | $2,260 | +$227/month | $2,487+taxes/ins |
| 5% ($17,500) | $17,500 down | $332,500 | $2,213 | +$222/month | $2,435+taxes/ins |
| 10% ($35,000) | $35,000 down | $315,000 | $2,096 | +$210/month | $2,306+taxes/ins |
| 20% ($70,000) | $70,000 down | $280,000 | $1,863 | No PMI | $1,863+taxes/ins |
| 30% ($105,000) | $105,000 down | $245,000 | $1,630 | No PMI | $1,630+taxes/ins |
Going from 5% to 20% down on a $350,000 home reduces the monthly payment by approximately $350-$580/month (PMI savings of $200-$220 plus lower principal and interest). Over 5 years, this represents $21,000-$34,800 in cumulative savings. Whether it is worth the additional $52,500 upfront depends on your alternative investment returns.
Key Points
- PMI is required when down payment is under 20% -- adds $100-$400/month depending on loan size and credit
- PMI can be canceled once you reach 20% equity through payments and/or appreciation
- Down payment minimum: 3% conventional, 3.5% FHA, 0% VA and USDA
- Each additional 5% down typically reduces the monthly payment by $150-$250 on a $300K home
- Opportunity cost: $35,000 in an index fund earning 8% instead of extra down payment = $5,130 in year 1
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