How Much Down Payment Do You Really Need? 5%, 10%, and 20% Compared

The "20% down payment rule" is one of the most persistent pieces of mortgage advice - and one of the most misunderstood. On a $400,000 home at 6.75%, putting 5% down requires just $20,000 at closing but adds PMI and results in $80,097 more total interest over 30 years compared to 20% down ($80,000 at closing). The 10% option lands in between: $40,000 down, moderate PMI duration, and roughly $53,000 in additional interest.

This article is for buyers deciding how much of their savings to commit to a down payment versus keeping reserves for closing costs, moving expenses, or an emergency fund.

The scenario modeled

All three scenarios use the same home price, rate, and 30-year term. Only the down payment percentage changes, which affects the loan amount, PMI requirement, and PMI duration. PMI rates below are representative for a 720+ credit score.

The findings

The 5% buyer enters homeownership with $60,000 less cash out of pocket than the 20% buyer - but pays roughly $161,000 more over the life of the loan when you add up extra interest and PMI. Whether that trade-off makes sense depends on what the retained cash could do: earn returns in the market, cover an emergency fund, or pay down higher-interest debt.

PMI on a conventional loan cancels automatically at 78% of the original purchase price. On the 5% scenario, that happens around month 128 (roughly year 11). On the 10% scenario, PMI drops off around month 99 (roughly year 8). For a deeper look at PMI mechanics, see When does PMI go away?

US context

Under the Homeowners Protection Act of 1998, servicers must automatically terminate borrower-paid PMI when the loan balance reaches 78% of the original property value (based on the amortization schedule, not current market value). Borrowers can also request cancellation at 80% with a written request and a good payment history. The CFPB notes that borrowers with less than 20% down should understand both the cost of PMI and the timeline for removal when deciding how much to put down.

Source: Consumer Financial Protection Bureau, "When can I remove private mortgage insurance (PMI) from my loan?" accessed May 2026. URL: https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/

When this applies, and when it does not

This comparison fits when: you have a conventional loan quote in hand, a 720+ credit score, and you are weighing how much savings to tie up at closing versus keeping liquid. The scenario is most relevant for primary residences with standard conforming loan limits.

Consider a smaller down payment when: putting 20% down would drain your emergency fund below 3-6 months of expenses, you carry credit card debt at 18-24% APR (every dollar sent to a 6.75% mortgage instead of that debt costs you the spread), or you need reserves for closing costs and moving expenses (budget 2-5% of the purchase price for closing costs alone).

Consider 20% down when: you have ample savings beyond the down payment, you want the lowest possible monthly obligation, or you value the certainty of no PMI and lower total interest. Buyers near retirement or on a fixed income especially benefit from the reduced monthly burden.

This model does not cover: FHA loans (which carry their own MIP schedule), VA loans (no PMI but a funding fee), lender-paid MI structures, or scenarios where the rate differs between down payment levels. Always compare your actual lender quotes at each down payment amount - the rate may improve with a larger down payment, widening the gap further. For FHA versus conventional trade-offs, see FHA vs conventional loans.