Is 20% Down Worth It? The Real Math Behind the Rule
The comparison up front
On a $400,000 home at 6.5%, here's what choosing 10% down versus 20% down looks like:
| 10% down | 20% down | |
|---|---|---|
| Down payment | $40,000 | $80,000 |
| Loan amount | $360,000 | $320,000 |
| Monthly P&I | $2,275 | $2,023 |
| PMI (est. 0.5%/yr) | ~$150/mo | $0 |
| Total monthly | ~$2,425 | ~$2,023 |
On paper, 20% down saves you about $400/month. But that's not the whole story.
What PMI actually costs — and when it ends
PMI (private mortgage insurance) protects the lender if you default. At a typical rate of 0.5% of the loan amount annually, that's about $150/month on a $360,000 loan.
The key thing most buyers don't realize: PMI is not permanent. Under the Homeowners Protection Act, you can request cancellation once you reach 20% equity — and it must be automatically removed at 22% equity. On a $400k home at 6.5%, that happens around month 95, roughly 7.9 years into the loan.
Total PMI paid before cancellation: about $14,250. That's real money — but spread over 8 years, it's about $1,780/year in exchange for keeping $40,000 liquid on day one.
The other side: what that $40k could do instead
When you put 20% down instead of 10%, that extra $40,000 goes into your home equity — where it earns no return. It builds value as the home appreciates, but it isn't compounding the way invested cash would.
At a 7% average annual return — roughly the long-run average for a diversified stock portfolio — $40,000 generates about $2,800/year, or ~$233/month in foregone investment income.
Subtract that from the apparent monthly savings of $402, and the real cost difference between 10% and 20% down is closer to ~$169/month.
It gets more interesting after year 8. Once PMI cancels, the 10% down buyer's monthly payment drops to $2,275. The 20% down buyer pays $2,023 — but their $40k is still locked in equity, still not compounding. Their real monthly cost, including opportunity cost, is $2,023 + $233 = $2,256. At that point the two paths are nearly identical — about $19/month apart.
When 20% down makes sense — and when it doesn't
Consider 20% down if: PMI premiums on your loan are on the higher end (above 0.8%/year, which tilts the math further toward 20%). You have a stable emergency fund beyond the down payment — not depleted by putting more down. You plan to stay in the home long enough for the lower payment to compound over 10+ years. Or your investment alternatives are conservative and you don't expect strong returns on the cash.
Consider less than 20% if: Waiting to save 20% means buying at higher prices or rates later — time in market matters. The larger down payment would wipe out your emergency fund, leaving you cash-poor after closing. You have disciplined investment habits and a high-confidence place to put the $40k. Or you're buying in a market where homes appreciate quickly — your equity builds faster, and PMI cancels sooner than the 8-year baseline.
Neither choice is automatically right. The $400/month headline gap overstates the real difference once you account for PMI cancellation timing and opportunity cost. Adjust the down payment slider in the calculator to see exactly how your specific numbers change.
Key takeaways
- On a $400k home at 6.5%, 10% down costs ~$402/month more than 20% down before accounting for anything else.
- PMI (typically 0.5%–1%/yr) is not permanent — on this example it cancels around year 8, after ~$14,250 total paid.
- The extra $40k you'd put toward 20% down has an opportunity cost of ~$233/month at a 7% investment return.
- After factoring in opportunity cost, the real monthly gap narrows to ~$169/month — not $400.
- After PMI cancels at year 8, the two paths cost nearly the same when opportunity cost is included (~$19/month apart).
- The right answer depends on your emergency fund, time horizon, and what you'd do with the cash instead.
See what your down payment changes
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