The 20% down payment is treated as gospel. But it’s not a rule — it’s an option, and not always the best one. Here’s what each down payment level actually costs and who it’s best for.
Down Payment Options
| Program | Min Down | PMI/MIP | Key Requirement |
|---|---|---|---|
| Conventional | 3% | Yes (cancelable at 20%) | Good credit (620+) |
| Conventional | 5-19% | Yes (cancelable at 20%) | Good credit |
| Conventional | 20% | No | Most cash upfront |
| FHA | 3.5% | Yes (life of loan if <10% down) | Credit 580+ |
| VA | 0% | No | Military service |
| USDA | 0% | Yes (annual fee) | Rural areas, income limits |
The 3% Down Reality
On a $350,000 home with 3% down ($10,500):
- Loan: $339,500
- PMI: ~$170/month (0.6% annual at 740+ credit)
- Monthly P&I + PMI: $2,385
- Total interest over 30 years: $457,000
Compare 20% down ($70,000):
- Loan: $280,000
- No PMI
- Monthly P&I: $1,826
- Total interest over 30 years: $377,000
The 3% down option costs $559/month more and $80,000 more in total interest. But it requires $59,500 less cash upfront.
FHA: Low Down, High Long-Term Cost
FHA loans accept credit scores as low as 580 with 3.5% down. The catch: FHA mortgage insurance premium (MIP) of 0.55% annually cannot be canceled unless you put down 10% or more. You’re stuck with it for the life of the loan or until you refinance into a conventional loan.
On a $339,000 FHA loan: MIP = $155/month forever. Over 30 years: $55,800 in mortgage insurance alone.
If your credit qualifies for a conventional loan, it’s almost always cheaper long-term due to PMI cancellation.
VA: The Best Deal Available
VA loans require zero down payment, charge no PMI, and typically offer the lowest rates. The funding fee (1.25-3.3% of loan amount, depending on usage and down payment) can be financed into the loan.
For eligible veterans and active-duty service members, this is objectively the best mortgage product available. If you qualify, use it.
The Opportunity Cost Argument
The argument for putting down less: invest the difference. If you put 3% down instead of 20% and invest the $59,500 difference at 8% annual return:
- After 5 years: $87,400 (gain of $27,900)
- After 10 years: $128,400 (gain of $68,900)
Meanwhile, PMI over 5 years costs approximately $10,200. The investment returns exceed the PMI cost.
This math works if you actually invest the difference. Most people don’t — they spend it on furniture, cars, or lifestyle inflation.
First-Time Buyer Programs
Most states offer down payment assistance programs for first-time buyers:
- Forgivable grants ($5,000-$20,000)
- Low-interest second mortgages
- Tax credits
- Reduced-rate first mortgages
Income and purchase price limits apply. Check your state housing finance agency for current programs.
Which Strategy Is Best?
- VA eligible: Use VA every time
- Strong credit, disciplined investor: 3-5% down, invest the rest
- Average credit, want simplicity: 10-15% down, lower PMI, cancel sooner
- Conservative, hate debt: 20% down, no PMI, lower payment
- Tight budget: FHA 3.5%, but plan to refinance to conventional when you hit 20% equity
Run your specific scenario with the HomeStats affordability calculator and check local costs on state pages.
For the complete financial analysis of purchase decisions, read The Resale Trap.