5% Down vs. 20% Down: The Real Math
The 20% down payment is the most expensive piece of advice in real estate. It is not a requirement. It never was. It is a threshold that removes mortgage insurance — and for a lot of buyers in Alabama and Florida, paying it is the wrong financial decision. Here is the actual math.
Get your quote — we will run both scenarios on your real numbers.
Side by side on a $400,000 home
| 5% down | 20% down | |
|---|---|---|
| Cash for down payment | $20,000 | $80,000 |
| Loan amount | $380,000 | $320,000 |
| Principal & interest | $2,402 | $2,023 |
| Mortgage insurance | ~$158 | $0 |
| Monthly (P&I + MI) | $2,560 | $2,023 |
Illustrative example at 6.5% for 30 years with mortgage insurance estimated at 0.5% annually. Not a rate quote or an offer of credit. Your actual rate, mortgage insurance, taxes, and insurance will differ.
The number that decides it
Putting 20% down saves you $537 a month. It costs you $60,000 up front.
$60,000 divided by $537 is 112 months. Nine years and four months before the larger down payment pays for itself.
Ask yourself one question: will you still have this exact mortgage in nine years?
Most people will not. They refinance, they move, they upgrade. The median homeowner does not hold a single mortgage for a decade. If you are in that majority, the 20% down payment lost you money and locked up $60,000 while doing it.
The part that makes 5% better than it looks
That $537 monthly gap is not permanent, because mortgage insurance on a conventional loan is cancellable.
Once your balance reaches 80% of the original value, you can request cancellation in writing. At 78% the servicer must remove it automatically. On this example, normal amortization alone gets you there in about ten years — but appreciation gets you there much faster, and you can cancel early based on a new appraisal once seasoning requirements are met.
In Alabama and Florida over the last several years, plenty of buyers have dropped PMI within three or four years on appreciation alone. When it comes off, the gap narrows to $379 — and the break-even stretches out even further.
This is a conventional-loan advantage specifically. FHA mortgage insurance generally lasts the life of the loan. Read the mechanics on conventional loans in Alabama and Florida.
What the $60,000 is worth if you keep it
The comparison above ignores the biggest factor: money you do not hand over still belongs to you.
- Reserves. A new roof, an HVAC failure, or a job loss is survivable with cash and catastrophic without it. Buying with 5% down and $40,000 in the bank is a stronger position than 20% down and $0.
- Florida insurance and escrow. The first year of homeowners insurance plus several months of tax escrow is collected at closing, and in Florida that number surprises people. Do not drain your account to hit 20% and then get blindsided at the table.
- Invested instead. $60,000 left invested rather than locked in home equity compounds. Home equity does not pay you anything until you sell or borrow against it.
- Buying sooner. If reaching 20% means three more years of renting, you pay three years of rent and buy at whatever prices have done in the meantime. That is usually the largest cost of all.
When 20% down genuinely is the right call
We are not going to pretend it is never correct.
- You have the cash and plenty left over. If $80,000 still leaves a healthy emergency fund, the lower payment is real and permanent.
- This is your forever home. Past that nine-year break-even, the math flips in favor of 20%.
- You need the payment lower to qualify. Sometimes a bigger down payment is what makes debt-to-income work.
- You are buying an investment property. Different rules and pricing — larger down payments are usually required and often better priced.
The options between 5% and 20%
It is not a binary choice. Every percentage point you add lowers both your payment and your mortgage insurance rate.
- 3% down — available to qualifying first-time buyers on a conventional loan. See first time homebuyer programs.
- 3.5% down — FHA, with a down payment that can be entirely gifted.
- $0 down — VA loans, with no mortgage insurance at all. If you are eligible, this beats everything on this page.
- 10% or 15% down — the middle ground almost nobody considers. Meaningfully cheaper mortgage insurance without draining your reserves.
- Assistance — Alabama and Florida down payment assistance can cover part of it outright.
And if the real obstacle is closing costs rather than the down payment, ask about the $5,000 lender credit toward closing costs.
FAQ
Do I need 20% down to buy a house?
No. Conventional loans start at 3% for qualifying first-time buyers and 5% otherwise, FHA at 3.5%, and VA at zero. The 20% threshold only determines whether you pay mortgage insurance.
How much is PMI on a conventional loan?
It varies with your credit score and down payment, commonly falling in a range around 0.3% to 1.0% of the loan amount annually. A higher score lowers it substantially, which is why it can be worth improving your score before applying.
When does PMI go away?
You can request cancellation once the balance reaches 80% of the original value, and it terminates automatically at 78%. If your home has appreciated, you may be able to cancel earlier using a new appraisal.
Is it better to put 5% down or 20% down?
On a $400,000 home, 20% down saves roughly $537 a month but costs $60,000 up front — a break-even of about nine years. If you will not hold the same mortgage that long, 5% down is usually the better financial decision.
Does a bigger down payment get me a better rate?
Somewhat. Loan-to-value is one pricing factor, so more down generally means slightly better pricing and lower mortgage insurance. The effect is smaller than most buyers expect.
Can I put 10% or 15% down instead?
Yes, and it is often the smartest answer. Mortgage insurance drops meaningfully at each tier, so you get much of the benefit of 20% without giving up your reserves.
See it on your numbers
Tell us the price range and we will send a written comparison at 3%, 5%, 10%, and 20% down — payment, cash to close, and break-even for each.