Mortgage Down Payment Strategies: 5%, 10%, or 20%?

Sarah has $80,000 saved. She's buying a $400K home. She can put 20% down ($80K), wipe out her savings, and avoid PMI. Or she can put 5% down ($20K), keep $60K in savings, and pay PMI. Which is better? The answer depends on numbers she probably hasn't run — and those numbers are closer than most first-time buyers expect.

The True Cost of Each Down Payment Level on a $400K Home

Assuming a 6.75% 30-year fixed rate, here's what each down payment scenario actually costs:

Monthly payment difference between 5% and 20% down: $564/month. Over 12 months, that's $6,768/year. PMI alone accounts for $175 of that difference.

But here's what the simple comparison misses: the 5% buyer kept $60,000 in the bank. That $60,000 has value. The question isn't "which option costs less?" — it's "which option produces the best financial outcome when you account for what you do with the difference?"

How Long Until PMI Goes Away?

PMI is required by conventional lenders when your down payment is under 20%. By law (Homeowners Protection Act), lenders must automatically cancel PMI when you reach 22% equity based on original purchase price. You can request removal when you hit 20%.

How fast you reach 20% equity depends on two factors: your mortgage amortization (how much principal you're paying down each month) and home price appreciation.

Scenario: 5% down on a $400K home, 3% annual appreciation:

• Month 1 equity: $20K down + minimal principal = ~5% equity
• At 3%/year appreciation + normal amortization: you'll typically reach 20% equity in approximately 5-6 years
• PMI total cost over 5 years at $175/month: $10,500

Scenario: 5% down, flat market (no appreciation):

• Without home value growth, you're relying entirely on amortization to build equity
• At 6.75% on a $380K loan, early monthly payments are heavily interest-weighted
• In year 1, roughly $2,100/month goes to interest; only ~$360 to principal
• Reaching 20% equity through amortization alone: 10+ years

This is why market conditions matter so much for the 5%-down decision. In an appreciating market, PMI is a temporary cost you'll eliminate in 5-6 years. In a flat or declining market, it could be a decade-long drag.

The PMI Removal Date Calculator shows you the exact month you'll hit 20% equity under different appreciation assumptions — which is more useful than any generic rule of thumb.

The Opportunity Cost Argument for Smaller Down Payments

This is the calculation most people skip. Sarah's $60,000 kept in savings instead of put into a down payment has two potential futures:

If invested in a diversified index fund at 7% annualized return:

• Year 1: $64,200
• Year 3: $73,500
• Year 5: $84,200 (after 5 years, the $60K has grown to ~$84K)

PMI paid over those same 5 years:

• $175/month × 60 months = $10,500

Net position at year 5 (if 5% down buyer invested the difference):

• Extra wealth from investment: $84,200 - $60,000 = $24,200 in gains
• Cost of PMI over 5 years: -$10,500
• Net advantage of 5% down: +$13,700 over the 20%-down buyer

This math holds when markets return near their historical average. It breaks down if the investment loses value (2022 scenario) or if home appreciation stalls and PMI extends past year 7.

The calculation also ignores the monthly payment difference. The 5%-down buyer pays an extra $564/month. If that extra payment is coming out of savings or credit rather than income, the equation changes entirely.

When 20% Down Is Actually the Better Choice

The opportunity cost argument favors smaller down payments in rising markets with consistent investment returns. But there are specific scenarios where 20% down wins:

Flat or declining market. If home prices are flat or falling, PMI removal is slower and the investment gain assumption is less reliable. In a market correction, your invested $60K might shrink to $45K while you're still paying PMI.

Rate sensitivity and DTI. At higher down payments, your loan-to-value (LTV) ratio improves. LTV pricing tiers from most lenders offer slightly better rates at 75% LTV vs 95% LTV — sometimes 0.25-0.5% better. On a $400K purchase, a 0.25% rate difference is about $55/month. Over 30 years, that's $19,800 in total interest — not negligible.

Debt-to-income ratio pressure. If the higher monthly payment at 5% down pushes your DTI above 43%, you may not qualify for the loan at all. Some borrowers don't have the option of the smaller down payment — lenders impose it through approval criteria.

Jumbo loan threshold. If a smaller down payment pushes your loan above the conforming loan limit (~$766,550 in most areas in 2026), you'll need a jumbo loan with stricter qualifying requirements and potentially higher rates. A slightly larger down payment that keeps you under the conforming limit can save more than the opportunity cost difference.

Running the Numbers for Your Situation

The right down payment isn't universal. It depends on your market's appreciation outlook, your investment returns, how long you plan to stay in the home, and your emergency fund position after the purchase.

Use the Mortgage Calculator to model two or three down payment scenarios side by side. Compare not just the monthly payment but the 30-year total cost. Then factor in what you'd do with the remaining cash. The actual numbers almost always tell a more nuanced story than either "always put 20% down" or "keep your cash invested."

The starting point for any down payment decision is knowing exactly what each scenario costs — monthly, over 5 years, and over 30 years. The calculator gives you all three.

This article provides general mortgage guidance. Consult a licensed mortgage professional for advice specific to your financial situation.