Maybe I’ve heard the conventional wisdom about a higher down payment. I should aim for 20% of the house’s buying price. But for a bundle of people in a bundle of markets, that’s a bundle of money. I can buy a home with as minimal as 3.5% down with an FHA loan. So sticker shock, I must be wondering whether putting a full 20% down payment is really all that essential.

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Here’s Why a 20% Home Down Payment Is So Vital

It’s actually not impossible to get a mortgage with a lower down payment. But 20% down payment really is the gold standard for a reason. Specifically, we can think of four reasons:

Zero PMI premiums. If I at least pay a 20% down payment of my buying price, I won’t have to pay private mortgage insurance or PMI. Lenders routinely need this of housebuyers who borrow more than 80% of the house’s value. This kind of insurance never results in any compensation. Its goal is to save the lender if he defaults (fail to pay back the loan on time). PMI generally costs from .5% to 1% of the loan amount, which can add several dollars annually to the home costs until I’m able to get my equity to the 20% down payment level, at which time PMI is no longer needed.

Small monthly mortgage payments. If I borrow less money, I will obviously have less to pay back. This leaves me off course with more cash for other things or potentially enables me to take out a shorter-term mortgage with a lesser interest rate.

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Greater loan options and terms. The greater my down payment is, the more flexibility I’ll have in terms of loan amounts and loan programs. Most loans over the conforming limit (jumbo loans) will need at least a 20% down payment. Whereas most ARM (adjustable-rate mortgage) programs don’t begin to offer lower rates than fixed until I get to at least a 20% down payment.

Greater purchasing power. A greater down payment means the person can afford to purchase a more expensive home. For example, if I’m budgeting for a $1,000 monthly mortgage payment and can receive an interest rate of 3% on a 30-year mortgage, with a 5% down payment I could afford to purchase a $171,000 home, which would include roughly $685 a month for principal and interest, about $90 in PMI and the remainder for taxes and other expenses. But with a 20% down payment, a $213,000 house would fit into my budget for that same $1,000 monthly payment, since I won’t have to pay PMI.

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Can I find more options low-down-payment loan options?

If you find yourself questioning what down payment to make, reach out to a pro mortgage loan officer. They can suggest to you all your loan options, as well as the prices they’ll come with.