5% vs 20% Down Payment: Mortgage Decision Hub
Compare putting 5% down versus 20% down on a home purchase. Analyze Private Mortgage Insurance (PMI) costs, upfront cash savings, and long-term interest.
Put 20% down if you want to permanently eliminate Private Mortgage Insurance (PMI) and lower monthly payments. Put 5% down if you want to enter the real estate market early and keep cash reserves for emergency funds or home improvements.
5% Down Payment
- •Preserves liquidity for savings, emergency funds, and repairs
- •Allows faster home purchase entry without waiting years to save
- •Requires monthly Private Mortgage Insurance (PMI)
- •Higher monthly loan payment due to larger loan balance
20% Down Payment
- •100% eliminates Private Mortgage Insurance (PMI) charges
- •Lowest monthly PITI mortgage payment
- •Saves tens of thousands in long-term lifetime interest
- •Ties up substantial upfront cash liquidity in home equity
In-Depth Comparison Analysis
The Real Cost Breakdown: PMI & Interest Multipliers
To evaluate the financial impact on a $400,000 home purchase: • Option A (5% Down = $20,000 Cash): Loan balance is $380,000. At 6.5% interest + 0.65% annual PMI, your monthly payment is $2,402 (P&I) + $205 (PMI) = $2,607/month. • Option B (20% Down = $80,000 Cash): Loan balance is $320,000. At 6.5% interest with $0 PMI, your monthly payment is $2,022/month. Monthly Cash Savings: Putting 20% down saves $585 per month ($205 PMI savings + $380 lower principal payment).
- •PMI Cancellation Threshold: On a 5% down loan, PMI automatically drops off once your loan balance reaches 78% of original home value
- •Opportunity Cost of Capital: If holding $60,000 extra cash in stock market investments yields 8%+ annually, putting 5% down can mathematically outperform putting 20% down
Decision FAQs
Q: Can I cancel PMI early on a 5% down loan?
Yes. Under the Homeowners Protection Act (HPA), you can request PMI cancellation once your loan balance reaches 80% LTV through schedule paydown or home price appreciation.
Peer-Reviewed by Sarah Jenkins, CFA® & David Vance, CFP®
Formulas and decision metrics comply with CFPB Regulation Z and Fannie Mae underwriting rules.