Home Ownership: Down Payment Strategies

More options than you think!

You’ve most likely heard the rule: Save for a 20-percent down payment before you buy a home. The logic behind saving 20 percent is solid, as it shows that you have the financial discipline and stability to save for a long-term goal like home ownership. It also helps you get favorable rates from lenders.

But there can be financial benefits to putting down a small down payment—as low as three percent—rather than parting with so much cash up front, even if you have the money available.


The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years, and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20-percent down payment, which will eliminate some homes from your search.


The national average for home appreciation is about five percent. The appreciation is independent from your home payment, so whether you put down 20 percent or three percent, the increase in equity is the same. If you’re looking at your home as an investment, putting down a smaller amount can lead to a higher return on investment, while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities.

It used to be that only 20% down payments would lead you to conventional financing, but that is not true. With good credit and 3% or more down, you may have options for a conventional mortgage. You can still compare to what FHA might offer you but understand you are not locked out of a conventional mortgage with a smaller down payment.


Of course, your home payment options aren’t binary. Most borrowers find some common ground between the security of a traditional 20 percent and an investment-focused, small down payment. There are many ways to make a mortgage happen; let’s discuss the best path for you towards homeownership.

Man by computer thinking about home ownership