Real Estate: $30K Isn’t Enough to Meet a 20% Down Payment — Here’s Why
Written by
Yaël Bizouati-Kennedy
Edited by
Nicholas Morine
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The currently turbulent housing market has made the road to homeownership extremely difficult for many Americans. Higher prices, lower inventory and soaring rates have all left many homebuyers in the lurch. Making the matter more thorny, down payments have also ballooned.
In fact, a recent Realtor.com report found that down payments have reached a new peak in the third quarter of 2023. Americans are making 14.7% down payments on average, with the median down payment being ~$30,000.
According to Danielle Hale, Realtor.com’s chief economist, there are a couple of reasons why down payments are rising.
First, with fewer for-sale home options to choose from, the housing market continues to be relatively competitive, and one key way that buyers can stand out is by making a larger down payment part of their offer.
Another reason for the rise in down payments is that they can help lower the monthly cost of a mortgage, she noted.
“More money upfront means less borrowed, and with mortgage rates continuing to hover around 7%, the cost of borrowing an extra dollar to buy a home is more than double what it was as recently as January 2022,” said Hale.
Should You Put a 20% Down Payment on a Home?
As The Motley Fool explained, a good rule of thumb is to put a 20% down payment on a home when you’re signing a conventional mortgage. If you don’t put down 20% at closing, you’ll be hit with private mortgage insurance, or PMI.
PMI is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20% of the purchase price, and it protects the lender — not you — if you stop making payments on your loan, according to the Consumer Financial Protection Bureau (CFPB).
But it’s also an added cost on top of already high mortgages and home prices.
Yet, many buyers are stuck with it. As the Realtor.com data showed, a downpayment of $30,400 still only amounts to an average of 14.7% down at closing — and “that’s below the threshold required to avoid PMI,” according to The Motley Fool.
In turn, buyers could get stuck paying PMI for a pretty long time. An added cost might make an already large expense even harder to manage.
According to Chase Bank, on average, PMI costs range between 0.22% to 2.25% of your mortgage. How much you pay depends on two main factors: your total loan amount and your credit score.
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