Should You Put 20% Down on a Conventional Loan? Let's Do the Math

“You need 20% down to buy a house.”

If I had a dollar for every time I heard someone repeat this myth, I could probably make a down payment myself.

Here’s the truth: you don’t need 20% down for a conventional loan. You can buy a home with as little as 3% down if you’re a first-time buyer, or 5% if you’re a repeat buyer. But whether you should put down less than 20% depends on your financial situation, goals, and what else you could do with that money.

Let’s break down the real math so you can make a smart decision for your situation.

What Actually Happens Below 20%

When you put down less than 20% on a conventional loan, you’ll pay Private Mortgage Insurance (PMI). This is an insurance premium that protects the lender if you default on the loan.

PMI typically costs between 0.3% and 1.5% of your loan amount annually, depending on your credit score, down payment amount, and loan-to-value ratio. On a $400,000 loan, that’s anywhere from $100 to $500 per month.

Let’s look at a real scenario:

Home Price: $400,000
20% Down Payment: $80,000 (3.75% interest rate, $1,481/month P&I)
5% Down Payment: $20,000 (4.00% interest rate + $350/month PMI, $1,873/month P&I + PMI)

The difference is about $392 per month, or $4,704 per year.

But here’s the part most people miss: by putting down only 5%, you kept $60,000 in your pocket. What could you do with that money?

The Opportunity Cost Nobody Talks About

Let’s say you invest that $60,000 difference in a diversified portfolio returning an average of 7% annually. Over five years, that grows to about $84,000.

Meanwhile, your home is (hopefully) appreciating. Once you hit 20% equity through appreciation and principal paydown, you can request PMI removal—often within 3-5 years depending on your market.

In this scenario, you paid roughly $23,500 in PMI over five years ($4,700/year), but you earned $24,000 in investment returns. You basically broke even on the PMI cost while maintaining liquidity and building equity in your home.

Plus, if an emergency hits—medical bills, job loss, major home repair—you have cash reserves instead of equity trapped in your house that you can’t easily access without a loan.

When 20% Down Makes Perfect Sense

I’m not saying you should always put down less. There are clear situations where 20% down is the smarter move:

Your monthly budget is tight. If an extra $400/month stresses your finances, the lower payment with 20% down provides peace of mind and cash flow breathing room.

You hate debt and PMI offends you. Some people just sleep better knowing they don’t have PMI. That’s valid. Personal finance is personal, and psychological comfort matters.

Interest rates are high. When rates are above 7%, the interest savings from a larger down payment become more significant. The math shifts in favor of putting more down to lower your principal balance.

You’re in a hot market with bidding wars. A larger down payment makes your offer stronger and shows sellers you’re a serious buyer with financial stability.

You have no better use for the cash. If that money would otherwise sit in a savings account earning 1%, you’re better off putting it toward the house and avoiding PMI.

The First-Time Buyer Sweet Spot

For first-time buyers, 3-10% down often makes the most sense. Here’s why:

You’re probably younger and have time for long-term wealth building. Keeping cash liquid lets you invest in retirement accounts, build emergency funds, and handle the inevitable costs of homeownership (new HVAC, roof repairs, furniture).

Programs like Fannie Mae HomeReady and Freddie Mac Home Possible are designed specifically for low-down-payment buyers with solid credit. If you have a 680+ credit score, these programs offer very competitive rates even with 3-5% down.

And here’s the secret: you can always make extra principal payments later to accelerate equity building. There’s no rule saying you can’t put down 5% now and pay extra toward principal when you get a bonus or tax refund.

PMI Isn’t Permanent—Here’s How to Remove It

A lot of people treat PMI like a life sentence. It’s not.

You can request PMI removal once you reach 20% equity through a combination of principal paydown and appreciation. In strong markets, this happens faster than you think.

Let’s say you buy a $400,000 home with 5% down. Your loan amount is $380,000. You need to get down to $320,000 (80% of original value) to remove PMI.

If your home appreciates 5% per year and you make regular payments, you’ll hit 20% equity in about 4-5 years. At that point, you can get an appraisal and request PMI removal. Total PMI paid: roughly $20,000.

Compare that to waiting two years to save up 20% while renting. If your rent is $2,500/month, you’ll spend $60,000 in rent with zero equity to show for it. Meanwhile, home prices might rise 10% ($40,000), effectively costing you $100,000 to avoid $20,000 in PMI.

The math doesn’t always favor waiting.

The Refinance Strategy

Here’s another approach a lot of borrowers use: buy now with low down payment and higher rate, then refinance when rates drop or your credit improves.

Let’s say you buy today with 5% down and a 6.5% rate. In two years, rates drop to 5.5% and your credit score has improved from 680 to 740. You refinance into the better rate, and if your home has appreciated enough, you can eliminate PMI in the process.

This strategy works especially well for buyers who know their income will increase or their credit will improve over time. You get into the home now, build equity through appreciation, and optimize your loan terms later.

Just make sure the refinance makes financial sense—generally, you want at least a 0.75% rate improvement to cover closing costs and make it worthwhile.

Regional Market Considerations

Your local market matters a lot in this decision.

In high-appreciation areas like Austin, Boise, or Nashville, putting down less and getting in sooner often wins. If homes are appreciating 8-10% annually, waiting to save 20% means chasing a moving target.

In slower markets with flat or declining prices, the calculus shifts. You’re not benefiting from rapid appreciation to help you reach 20% equity faster, so the long-term cost of PMI becomes more significant.

Talk to a local loan officer who knows your market trends. They can run scenarios showing what’s happened historically with home values in your area and how that impacts the down payment decision.

Don’t Drain Your Emergency Fund

Here’s a rule I wish more buyers followed: never put down so much that you’re left with less than 3-6 months of expenses in emergency savings.

I’ve seen buyers scrape together 20% down only to be financially stressed the moment their water heater dies or their car needs major repairs. Then they’re forced to put emergency expenses on credit cards at 22% interest—the exact debt they should be avoiding.

A healthy financial picture includes home equity AND liquid savings AND retirement contributions. Don’t sacrifice everything for a slightly lower mortgage payment.

Your Down Payment Decision

There’s no universal right answer here. The best down payment amount depends on your credit score, interest rates, local market conditions, alternative investment opportunities, comfort with debt, and emergency fund status.

My general advice: put down enough to keep your monthly payment comfortable, but not so much that you’re house-poor or depleting your cash reserves. For most conventional loan buyers, that usually lands somewhere between 5% and 15%.

Want to model different down payment scenarios with a licensed loan officer who can show you exact monthly payments and break-even points? Visit Browse Lenders to connect with verified professionals who’ll walk you through the math without pressure.