The advice to "put 20% down" has been passed down for generations. It eliminates PMI, lowers your rate, and signals financial stability to lenders. But with home prices where they are, waiting to save 20% often means years of renting — and years of missing out on appreciation and equity building. Here's the full math on both sides.
The Core Trade-Off
On a $400,000 home, 20% down means $80,000 up front. Ten percent means $40,000. That $40,000 difference could be: invested in the market, kept as a larger emergency fund, used to renovate the home, or simply kept liquid.
The question isn't which is "better" in the abstract — it's which produces better financial outcomes for your specific situation, timeline, and risk tolerance.
The Real Cost of PMI
Private Mortgage Insurance (PMI) is required on conventional loans when your down payment is below 20%. It typically costs 0.5% to 1.5% of the loan amount per year, depending on your credit score, loan type, and lender.
On a $360,000 loan (10% down on a $400,000 home), PMI at 0.8% adds $240/month to your payment. That's $2,880 per year — until your LTV drops to 80%, at which point you can request cancellation.
How long does that take? On a standard amortization schedule, it takes roughly 7–9 years to reach 80% LTV on a 30-year loan. Add in any home price appreciation and it can happen faster.
$400k home, 10% down, $360k loan at 0.8% PMI rate: → $240/month in PMI → ~7 years to reach 80% LTV (without extra payments) → ~$20,000 total PMI paid before cancellation
The Rate Difference
A 10% down payment typically comes with a slightly higher interest rate than a 20% down payment — usually 0.125% to 0.375% higher on a conventional loan, depending on current market conditions and your credit score.
On a $360,000 loan, a 0.25% rate increase adds about $57/month. Over 30 years, that's an extra $20,000 in interest. The higher the loan amount, the larger the gap.
Total Extra Cost of 10% Down
So the extra cost of putting 10% down is roughly $26,800 over 10 years — assuming you don't accelerate PMI removal. That's real money. But it came with $40,000 of capital you kept.
| Cost Component | 10% Down | 20% Down | Difference (10yr) |
|---|---|---|---|
| Down payment | $40,000 | $80,000 | -$40,000 (you keep) |
| PMI (7 years) | ~$20,000 | $0 | +$20,000 |
| Rate premium (0.25%) | ~$6,800 | $0 | +$6,800 (10yr) |
| Net extra cost at 10% | — | — | ~$26,800 over 10yr |
What Did That $40,000 Do in the Meantime?
If the $40,000 you didn't put toward a down payment was invested in a diversified index fund returning 8% annually, after 10 years it grows to approximately $86,000 — a gain of $46,000.
Net position: you paid an extra ~$27,000 in PMI + rate premium, but your invested $40,000 grew by ~$46,000. Net positive by ~$19,000 — despite paying PMI.
This assumes the market returns 8% and you actually invest the difference. If the $40,000 would have sat in a savings account at 2%, the math flips: 10% down loses.
The argument for 10% down depends entirely on actually deploying the retained capital productively. If you spend it or leave it in a low-yield account, 20% down wins clearly.
When 20% Down Is Clearly Better
- You can save 20% in under 12 months — the delay is short and you avoid all PMI.
- You're buying in a competitive market where a larger down payment strengthens your offer.
- Your investment discipline is uncertain and you'd likely spend the difference.
- You're buying a forever home and want maximum equity from day one.
- Current interest rates make the rate premium on lower down payments especially steep.
When 10% Down Makes Sense
- Home prices are rising in your target market and waiting costs you more in appreciation than PMI costs.
- You have high-earning years ahead and can easily afford the higher payment.
- You have strong investment discipline and will actually invest the difference.
- Your emergency fund would be dangerously depleted by a 20% down payment.
- You qualify for lender-paid PMI (LPMI) which rolls PMI into a slightly higher rate instead.
The 20% rule isn't wrong — it's just not universal. PMI is a real cost, but so is waiting years to buy in a rising market, or depleting your liquid savings entirely. Use the Mortgage Calculator to model your exact situation: your home price, rate, credit score, and PMI estimate. Then decide based on your full financial picture, not just the conventional wisdom.
