The average down payment for home purchases has increased to 13.6% in the first quarter of 2024, according to data from Realtor.com. Despite this uptick, it is still far below the perceived standard of 20% that many people associate with buying a home. The median down payment amount was reported at $26,000, indicating that buyers are putting down more money but not necessarily reaching the 20% mark.
The Myth of the 20% Down Payment
There are various reasons why the 20% down payment has become the gold standard in home purchasing. Some individuals aim for this amount to avoid mortgage insurance or lower their monthly payments. However, according to Mark Hamrick, a senior economic analyst at Bankrate.com, this belief is not a hard and fast rule. While putting down more money can reduce monthly mortgage costs, it may not be feasible for many households due to affordability constraints in the current housing market.
The lack of sufficient savings for a down payment poses a significant hurdle for potential homebuyers. A CNBC Your Money Survey revealed that nearly 40% of Americans who do not own a house attribute their inability to save as a reason for not purchasing a home. This challenge is further exacerbated by rising home prices, making it even more difficult for individuals to reach the perceived 20% down payment threshold.
Despite the common belief that a 20% down payment is necessary, experts suggest that it is not a requirement. Data shows that the average down payment on a house nationally falls within the range of 10% to 15%, with some states even reporting averages below 10%. Various loan programs, such as VA loans, USDA loans, and FHA loans, offer options for buyers to put down as little as 0% or 3.5%, depending on their eligibility criteria.
When determining the appropriate down payment amount, buyers should weigh the potential costs associated with smaller upfront payments. While a lower down payment can address affordability challenges, it may result in higher monthly mortgage costs. Additionally, borrowers with less than 20% down payment may incur additional expenses such as private mortgage insurance (PMI). PMI can range from 0.5% to 1.5% of the loan amount annually, adding to the overall cost of homeownership.
Buyers who are unable to meet the 20% down payment threshold may opt for a “piggyback mortgage,” which involves obtaining a second loan to reach the desired amount and avoid paying for mortgage insurance. However, it is essential to consider that the second loan typically comes with a higher mortgage rate, potentially offsetting the benefits of avoiding PMI. Ultimately, individuals should carefully evaluate their financial situation and consider the available loan programs when determining the optimal down payment amount for their home purchase.