You’ve likely heard that you need 20 percent down to purchase a home, but that’s a common mortgage myth. According to the National Association of REALTORS®, the average homebuyer in 2020 put down 12 percent, and for first-time buyers that dropped to 7 percent.

But what if you’re in a situation where you can put down 20 percent or more? Should you? Surprisingly the answer may be ‘no’, but it all depends on your financial profile and home buying goals.

Less money down means higher monthly payments
Obviously the less you borrow, the less you’ll have to pay back in the long run. And the more you pay up front, the lower your monthly mortgage payments will be. Keeping your payments manageable can make things easier should you experience a sudden life change, like the loss of a job.

But Jameel Abdo with Glacier Financial says because interest rates are at historic lows, putting down more doesn’t result in as significant of savings as it may have in the past.

“Generally speaking, putting down an additional $10,000 on a 30-year term will save the average buyer approximately $42 a month,” he said. “With money being so incredibly cheap to borrow right now, many buyers are choosing to keep that ‘extra’ money for emergency savings, home improvements and repairs, or other investments.”

Less than 20 Percent down means PMI
On a conventional loan, private mortgage insurance (PMI) serves as protection for the lender’s investment should the borrower default on the mortgage. Lenders require PMI whenever a borrower puts down less than 20%, and typical rates run about .5% to 1% of the loan balance per year, but it could be higher or lower depending on your financial profile.

However, Abdo says that buyers need to run the numbers because PMI doesn’t always make or break a deal.

“Mortgage insurance rates have dropped quite a bit since 2011-2012 because foreclosures are down significantly,” he said. “I recently worked with a client who was thinking of putting down 20 percent to avoid PMI, but when I ran the quote, it would only save him $43 a month. While that amount could be higher depending on each buyer’s loan amount and credit score, it’s definitely worth looking into.”

And remember that with a conventional mortgage, PMI falls off once the borrower hits 80% loan-to-value. In government-backed loans like FHA, mortgage insurance is paid for the life of the loan, and rates may also be a bit higher.

The more money you put down, the less you have in savings
A big issue facing homebuyers is a shortage of cash after closing. The problem is, once you close on a home, you’ll have other expenses. You may have higher utility costs, you’ll be responsible for routine home maintenance, you may have unexpected repairs pop up, or you may have necessities like appliances, lawn equipment, or furniture.

It is a good practice for homeowners to set aside one to three percent of their home’s value in an emergency fund. So, if your home is worth $250,000, you should reserve between $2,500 and $7,500 for emergency repairs.  

If making a 20 percent down payment leaves you with very little in savings, it may not be the right move. Keeping some money in the bank will keep you liquid during those early months, and that can alleviate a lot of stress.

Abdo is a staunch advocate for a healthy emergency fund, but he also warns buyers against thinking their money is “gone” once they make their down payment.

“The money is still yours, it's just been converted from cash to home equity,” he said. “Assuming values continue to appreciate, you will get that money back when you sell, and you can also access it by refinancing or taking out a home equity loan. Yes, it’s more difficult to get to than cash in the bank, but it is doable.”

The higher the down payment, the higher the risk
While a lower down payment is riskier for a lender, a higher down payment can be riskier for the buyer. In general, as the U.S. economy improves, home values rise. Conversely, when the economy is in a downturn, values drop. Because of this link, buyers who make larger down payments may find themselves at risk of losing more should the housing market fall.

Fortunately, housing prices have continued to rise over the past couple of years.

Talk to a local professional to crunch the numbers
When it comes to home loans and down payments, there’s no one-size-fits-all answer. Everyone’s finances and home buying goals are unique, and that’s why it’s important to consult a local, experienced lender who can answer all your questions.

“There is nothing wrong with putting down less than 20 percent,” said Abdo. “In fact, the average down payment I’m seeing right now is between five and 10 percent. On the other hand, there are benefits of putting down more if you’re in the position to do so. The best thing you can do is talk with a trusted lender who will help educate you on your options and lay out all the pros and cons.”

To find a list of professional area lenders, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.