“You need 20% down” is one of the most repeated — and most misleading — rules in home buying. Twenty percent is a meaningful threshold, but it is not a legal minimum, and for many buyers it is not even the smartest target. The real decision is a balance between getting into a home sooner with a smaller down payment and the lower cost and risk that come with a larger one. There is no single correct number, only trade-offs to weigh against your own situation.
A down payment does three things at once: it reduces the amount you have to borrow, it determines whether you owe mortgage insurance, and it uses up cash that could have gone somewhere else. Each of those deserves its own look.
What 5% versus 20% actually changes
Say you are buying a $400,000 home. Put down 5% ($20,000) and you borrow $380,000. Put down 20% ($80,000) and you borrow $320,000. That $60,000 difference in loan size lowers your monthly principal and interest, and — because you are now at or below 80% loan-to-value — removes mortgage insurance from the picture entirely on a conventional US loan.
- Smaller down payment: you keep more cash, buy sooner, but carry a bigger loan, a higher payment, and usually mortgage insurance until you reach enough equity.
- Larger down payment: smaller loan, lower payment, no insurance at 20%, and instant equity — but far more cash locked in the house.
The PMI threshold
The 20% figure gets its power from mortgage insurance. On a conventional US loan, putting down less than 20% typically triggers private mortgage insurance (PMI), an extra monthly cost that protects the lender. Reach 20% equity and you can shed it. Canada uses a similar 20% line, below which mortgage default insurance is mandatory. So 20% is not about qualifying — plenty of loans allow 3–5% down — it is the point where a recurring cost disappears.
Twenty percent down is not a rule about whether you can buy. It is the line where mortgage insurance falls away — a cost target, not an entry requirement.
The opportunity cost of a huge down payment
A bigger down payment is not free money saved — it is cash you can no longer use elsewhere. That $60,000 sunk into a larger down payment cannot sit in your emergency fund, cannot go into retirement accounts capturing an employer match, and cannot pay off higher-interest debt. If those alternatives offer a better return than your mortgage rate, an oversized down payment can actually cost you. And a house that leaves you cash-poor is fragile: home equity is hard to tap in an emergency.
There is also a risk dimension. A larger down payment means more of your net worth is concentrated in a single, illiquid asset whose value can fall. A smaller down payment keeps more of your wealth liquid and diversified — at the price of a bigger loan and insurance.
How to choose your number
- Keep a full emergency fund intact — never drain it to reach 20%.
- Weigh the PMI cost against what your cash could earn or save elsewhere; sometimes paying PMI for a few years is the better deal.
- Remember closing costs (roughly 2–5% of the price) come on top of the down payment, so budget for both.
- Aim for the down payment that leaves you with a comfortable payment and a healthy cash cushion — not simply the largest one you can scrape together.