Is Putting a 20% Down Payment on a House Realistic?

I understand the argument behind the advice of putting at least a 20% down payment on a house purchase. No one wants to pay private mortgage insurance and the idea of getting two different loans to avoid it isn’t that great either. I imagine if you are a previous homeowner and have some equity from a previous house to put down on a new one, a 20% down payment is very feasible, but what about first time home buyers?

Sometimes Waiting Doesn’t Pay

In the area that I currently live, the average home price is about $175,000 for a decent starter home. That’s actually a pretty low price compared to where I grew up across the state, where you can’t get a decent starter home for under $275,000. Let’s say someone wanted to buy a home for the first time. A 20% down payment for an average house in each area would be $35,000 and $50,000 respectively (and that doesn’t even include closing costs) Who has that kind of cash readily available? Not many people. So the advice many are given is to save up and wait.

Let’s look at what that would look like. Say you are able to save $500 a month towards your down payment. You are able to knock down your costs and pull aside that much every month. It would take you almost 6 years of saving $500 a month in order to afford the 20% down payment in the less expensive city and over 9 years to afford the one in the pricier area.

What if you were able to save $1000 a month? Then it would take you 3 years and 4.5 years respectively. But saving $1000 a month is quite difficult when you are trying to fund a retirement account and live day to day. Especially for up to 9 years. Most first home buyers are younger – probably in their 20s. In the b est case scenario you need to save for 3 years – in the worst case it would be 9 years (this is assuming you already have a sizable emergency fund to take care of unexpected expenses).

It is even harder when you start looking at this from a market standpoint. House prices will rise. I don’t care what the housing market looks like now – eventually the values will rise again. Let’s say values rise at a conservative 1% per year. In 3 years, each “average” house will cost at least $5,500 and $8,500 more, respectively. In 9 years, each house will cost at least $16,000 and $25,000 more, respectively.

Everyone who finally reached their 20% down payment goal will now need more money than originally thought for the down payment of a home that is now more expensive. Not to mention the money lost on throwing away rent rather than building equity (however small that amount may be in the first few years). Add to that the tax deductions missed and the missed opportunity to profit from the market’s increasing values. Ouch! Those numbers aren’t pretty. You have to spend money on housing either way – why not get some benefits from it?

Chances are, if you are saving a huge chunk of money each month for a large house down payment, you aren’t contributing the max to your retirement account. Your early investing years are the most critical for your future because of the wonderful concept called compounding interest. You could lose some very valuable interest time by waiting to invest (or increase your investment amount).

Perhaps there are some people for which putting a 20% down payment on a house is not only possible, but also a perfect fit for them. I personally don’t know any of those people and am not one of them. We chose to buy our house with no money down and use our monthly extra to invest more, stock up our retirement fund, fund our emergency savings, and make improvements to our house that will increase the value when we go to sell.

The funny thing is that our mortgage is not outrageous, we are not struggling to keep up with our payments and we are not in jeopardy of defaulting on our loan. The fact of the matter is that there are people who are a high risk to mortgage companies who will likely default on their loan if they get into a house with no money down. But there are also responsible people who will pay their mortgage on time every month who just want to have a choice of what to do with their extra money and how to best use it.

Image courtesy of Sarah Serendipity

This entry was posted in Budgeting, Debt, Housing, Investing, Personal Finance, Retirement, Saving Money, Taxes. Bookmark the permalink.

31 Responses to Is Putting a 20% Down Payment on a House Realistic?

  1. Minimum Wage says:

    That “moving target” problem has been one of my pet peeves for a long time: the idea that the amount you need to save for a down payment rises over time so that by the time you “get there” you’re not there because the target has moved upward.

    I realized early on that I would probably never be able to buy a home because the prices were rising faster than my income.

  2. California Renter says:

    This is especially true in california. Even assuming prices rising 1%, one would still be behind at the end of 3 or worst 9 years.
    Probably the reason so many people jumped into the housing craze. Although it could be said that most people werent thinking about 20%, but were rather trying to make that quick profit.

  3. Frugal Momma says:

    While the concept of saving 20% down is a good idea, but not realistic. 12 years ago, we only put 5% down on the house- I do wish that we did a bit more. However we are still in the house and PMI was gone many years ago.

    If we waited our $140k house went to $200k just 3-4 years later and now similar house in our neigborhood are in the high 200 to 300

  4. disneysteve says:

    I still think 20% is ideal, but if not achievable, folks should still strive for the largest possible downpayment. So many of the homes now in foreclosure got there because folks bought with little to nothing down and ended up upside down on the loans when they needed to sell. They found themselves with negative equity when home values started to dip. That isn’t a situation you want to be in. Had these folks put down 20%, or even 10-15%, that probably wouldn’t have happened.

  5. Spokane Al says:

    I believe that a 20% down payment is an excellent goal. Everytime someone says that things are different now and the old rules do not apply, they end up getting burnt.

    Often people believe that housing prices rise in a straight line, and this is not true. We can witness the ups and downs of the various housing markets over the recent past.

    I believe that by carefully saving, and smart shopping the potential home buyer can find a good deal that meets his/her needs rather than not saving any down payment, buying in a panic, and perhaps even getting caught up in payments that will cause problems further down the line.

  6. Teri says:

    I really have to agree with Steve.

    Yes, 20% down is very realistic if you are willing to drive older cars, work extra jobs, and lower your sights for your first home (all temporary). The way you eliminate the moving target problem is to start smaller (perhaps a condo) and move up. We grew up in the most expensive area of the country (Think $600k to buy a starter house that needs FIXING) and all of our young relatives did the same, started small, re-prioritized, and then bought up with time. We all owned houses in our 20s. We all started with something much smaller.

    Of course in today’s market, in this area, if you can’t afford to put anything down, you have no business buying a house. How can you afford a $3k-$5k/month mortgage if you can’t save anything for a down? Really, that’s my perspective. But the foreclosure rate is insane here right now.

    I have to tell you too ever since we started worrying how to buy a house a decade ago it has just been bubble territory. It’s been that way a long while. When we throw out “20% downs” because of the “impossibility of moving targets” is when we completely lose sight that the market is cyclical. It doesn’t always go up. Even I *get* that even though I have only seen it go up for an entire decade. People need to think more long term. There is no reason to rush a house purchase and jump in over your head. We balanced wanting to get in early and keep our costs down with being realistic and not jumping too soon. Going in with 0 down makes it harder to keep that balance and easier to jump without looking. I am sure it works for some. For many others it is dangerous ground.

  7. Traciatim says:

    Though I don’t really agree that 20% is out of the question I think the main goal should be to buy a home you can afford, if you but 0% down, 5%, or 50%. If you can’t afford the mortgage payments then you can’t afford the house.

    I put only 5% down on my starter first home. I have a spouse who works but at the time was in school so she wasn’t included in our mortgage qualifier. Even after that we only purchased a home that was at about 60% the cost of the amount the bank said we could afford (because they love lending money).

    Now that she is back to work, it’s smooth sailing all the way, our income is about 60% higher than it was when we purchased, and our house is a fine fit for our family. Once the kids get older (8-10 years) we may need to step up a notch, but we have a basement ripe for finishing, and will have plenty of equity around when we make our extra lump sum payments each year. Hopefully things can run fairly smoothly the whole time.

  8. Mark says:


    Great. How much equity do you have? You’re probably just paying interest every month to the bank and getting no closer to actually owning your home. You’re just renting it from the bank.

  9. poundwise says:

    Looking at the payment is the complete wrong way to examine the cost of buying a home, a car, or virtually anything else.

    Just because the payment is right doesn’t mean the item is affordable to you. This is why most people are upside down in their cars and have “owned” (sarcasm) their homes for 5 or more years with very little (percentage-wise) equity to show for it.

    A substantial down-payment is important. If you are counting on house values rising you need to consider that they do not always (short-term) and that, even if they do, you cannot always sell readily, etc. 20% is a nice number because it is both a substantial down-payment and a number that allows you to avoid PMI.

    If you live where housing is very high, then 20% may be genuinely out-of-reach. 6% may be substantial. If that’s the case, go with 6%. If you go in with ZERO down on a home, you are being foolish and, frankly, are “buying” (sarcasm) a house that you cannot afford (as evidenced by your zero money invested in it.)

    Be smart.

  10. 20 percent down seems ideal, but pretty steep.

    In addition to saving for the down payment, it’s also important to make sure there is an emergency fund just for the house.

    Right after my sister closed on her home in central florida, a bad storm came through and she had to pay thousands on repairs–almost weeks after the closing.

    Not everyone faces such weather-related trauma, but my sister recommends saving for a house-repair fund also.

  11. JD says:

    You make some pretty crazy assumptions. For instance you say:

    “Chances are, if you are saving a huge chunk of money each month for a large house down payment, you aren’t contributing the max to your retirement account.”

    Huh??? You know a lot of us young people make very good incomes. I contribute the max to my 401k out of my first several paychecks each year. In our plan we’re allowed to put up to 86% of our paycheck into our 401k and that’s what I do, after it maxes out to $15.5K or whatever the contributions stop. While that 86% is being deducted I have more than enough money in savings to take care of my expenses. I have saved over $100K for a downpayment outside of my 401k and my 12-month “emergency” fund. Plus more money in stocks as well. This is not just me, most of my friends have a similar financial profile.

    We live in a high cost area (NYC). The typical 1-bedroom in a decent area will cost you over $800K and most of them are co-ops which require more than 20% down (often 40%). This is a big reason housing prices in Manhattan haven’t gone down even in the current market. Most housing is co-op and the co-op boards only allow people who can easily afford the home. There was a small condo boom in Manhattan over the last several years and those have been effected a little bit, prices down a couple percent but nothing major. The condos do allow you to put 20% or less even. However myself and most people I know don’t like the condo buildings and prefer the co-ops.

    You say things like saving $1000 a month is hard for people when they’re funding a retirement account, etc. But you make no assumption about peoples’ earnings. Here in Manhattan it’s extremely common for 20-somethings to earn 6-figures. Me and most of my friends do and we’re not investment bankers or lawyers. I work in tech for instance. Saving $1000 a month is nothing. It’s extremely easy for me to do but it won’t get me anywhere.

    As far as houses in the $200k-$300k range go you won’t find them anywhere in or near NYC. You’d probably have to travel 100 miles away from the city to find things that cheap. But then again in those areas you probably wouldn’t find too many 23 year olds making 6-figures.

  12. Minimum Wage says:

    Yes, 20% down is very realistic if you are willing to drive older cars, work extra jobs, and lower your sights for your first home (all temporary). The way you eliminate the moving target problem is to start smaller (perhaps a condo) and move up.

    Don’t think there’s anything affordable on a minimum wage income, and 20% is certainly unrealistic. Starter homes in my area cost 10x a minimum wage income.

  13. JD says:

    Most people earn much more than minimum wage.

  14. Brian says:

    I don’t think your doomed to failure for not putting 20% down on a house. However, there are several things to consider when deciding how much to put down. Let’s look at how much PMI cost you. Let’s suppose your trying to decide between putting 5% down and 20% down. On a $100,000 PMI will run around $500 per year. To save that 500 dollars you need to put down and extra $15,000. Or put if we put it the other way it will cost an extra $500 per year to borrow that last $15,000. That means that extra $15,000 cost 3.33% per year. Not too bad, but now you have to pay interest on top of that. If you get a mortgage for 6.5% your actual cost for the $15,000 will be 9.83% per year. That’s not much better than putting your down payment on a credit card.
    What about the posters talk about waiting 9 years to buy a house, meanwhile the housing prices are going up. One of the things that wasn’t figured into the equation was the return on the saving that you put away for all those years. If you invest $500 per month in a mutual fund that makes 12% returns, in nine years you will accumulate $113,000. That would allow you to put a nice down payment on a house. In some parts of the country you could pay cash for the house.
    The main thing I would consider is the cost of owning versus renting. If your mortgage (plus taxes and insurance) are cheaper than the cost of renting, then your probably better off buying a little sooner.

  15. To Brian says:

    To the above poster (Brian). You make a good point about including the earnings on your savings into the equation. However your assumptions are pretty optimistic. You’d be pretty lucky to be in a mutual fund that returns 12% a year for a decade, but nonetheless there are a number that have done that over the past decade. Your calculation is a little high though, I get it works out to around $98K after 9 years. Also you aren’t figuring in taxes. Assuming you never have to reallocate and you just pay taxes at the end you are going to pay somewhere around $15K in taxes, bringing you down to around $83K. Then factor in the rise in housing prices over that time and the $500/month doesn’t move you forward all that much if you’re looking to buy in any even moderately popular area of the country.

  16. Licky Dog Breath says:

    One other advantage to a 2nd loan is that the 2nd mortgage issuer these days ought to be very concerned with whether the home is fairly priced, and not fund a situation where there would be negative equity. That protects the buyer from overpaying. When I go shopping for a home, even though I have the funds for 20% down, I plan to plead poverty when negotiating the price. I will be home shopping in work clothes, arriving in a rusty, dented used car. As if (like many people) I don’t have that 20% – because getting those 2nd mortgages is becoming very difficult. That difficulty will be an excellent bargaining chip in negotiating a fair/realistic price.

  17. Minimum Wage says:

    Most people earn much more than minimum wage.

    Question for “free market” advocates:

    Where’s the private sector when you need them? Why aren’t they building for this sectopr of the market?

    Every other niche market seems to be served.

  18. dave says:

    Yes, the price of the home increases, but assumedly we’re not saving our down payment in a mattress, right? What if we sock that $500 or $1000 a month into an index fund? By and large, that’s going to grow faster than housing prices increase, the already popped bubble notwithstanding.

    I’ve been doing almost exactly that ($250 a week) for about 5 years, and i have an extremely nice downpayment saved up! 🙂 I could buy a house now, but my apartment’s fine for now, and i think the housing market will decline a bit more.

  19. disneysteve says:

    Where you should be saving your downpayment money depends largely on your timeline. If you plan to buy in 5 years or less, you should probably avoid the stock market as you don’t have time to ride out a market downturn. With a short timeline, you should stick with high-yield money market accounts or CDs.

  20. ab says:

    I work in the financial management area of a Fortune 500 home builder with a mortgage arm. I do not disagree with your basic premise that putting 20% down might not be realistic for all people. In fact I put 3% down on my first home using an FHA loan, but that was long before the current downturn in housing.

    I think you are setting unrealistic expectations based on what people can actually get today.

    So lets get real with today

  21. Washington Renter says:

    I think the article hits the issues just right. I can’t think of anyone I know (even successful people) who has or has been successful saving toward 20% of the cost of an average home for the area just lying around. The median cost of a home where I live is $250,000 – 20% of that is $50,000! Wages just aren’t keeping up with inflation, rising fuel costs, rising food costs, rising medical costs, and a multitude of other things that make saving money that much harder.
    I’ll admit the housing market is cyclical – but it has always rebounded and costs have ALWAYS ended up higher then before the fall. We can’t hold onto hopes that housing will decline to the point where those of us earning less than a 6-figure income will come up with that 20% down before we end up with grandchildren. Of course it is up to the individual to be smart – stick to a budget, eliminate extra things from your finances you don’t need, see if you can get rid of that high car payment by trading it in on something older or less fancy, and consolidate whatever debt you may already have. If you’ve done that, take the down payment assistance or go in with just the 3-5% down. Yes you have to carry mortgage insurance but if you stick to your budget it wont be too big of a pill to swallow. Buy a fixer or a small house. Add onto it or improve it over time as you can afford to. Be content being there for a while until you can sell and get the money out of it so your next purchase puts you where you want to be. You are always better off owning your own piece of real property.

  22. Anne says:

    While I agree with the point that there may not be a hard and fast rule, always, for home buying, I find this article hilarious and ironic now, in our current housing market. Yes, the market cycles.

  23. Cory says:

    This is so ridiculous it makes me laugh in 2010. There is no confidence anymore like you say there is.

  24. WaW says:

    Nice that none of you seem to get that not everyone who longs to own a home to grow “old” in will ever, regardless of how supreme credit ratings are, be able to afford this. It does not make us stupid or lazy or naive or poor with money.

    Owning a home is not an elitist club.

    If you can put down 20% be grateful for your immense blessing but don’t look down your nose at those who can’t.

  25. Rjh says:

    20% seems really steep to me. If you can easily save up that much money then why not just stick it out for the other 80? I mean seriously if I had that kind of money just lying around why would I even bother with a damn loan. Do you know how long it would take a minimum wage worker to save up that kind of money? Especially while they are trying to rent out a place. Where I live it’s quite common for people to make minimum wage or around minimum wage. Of course the houses are cheaper as well, but even on a 100,000 home that’s still 20,000. For a renter in my area the rent is probably 800 a month plus utilities. Making 8.00 an hour a person only makes around a thousand a month. That leaves little to no money left to save for a house. In my area it almost makes more sense to buy then to rent, especially sense in the long run your paying for something that’ll be yours. I know a lot of people say putting no money down isnt going to be profitable, but a lot of people buy homes to live in not to make a profit in the end.

  26. CP says:

    86%…you must live with your parents…

  27. ash says:

    or if they had bought cheaper houses

  28. Tonya says:

    The last two posters have it right.
    People have lives going on while they try to save up the unrealistic 20%. Some people are trying to get off minimum wage and go to school. Some people have to rent while saving up.

    I am only 25 and I have always been super smart with my money, but I know I won’t be able to have $20 -50k to put down.

    The truth is people try to buy out of their affordablity.
    The banks need to be more realistic to what they loan to people.

  29. Priscilla says:

    I just can’t agree with some of the comments on this article stating that you’re foolish if you get into a house with less than a 20% down payment.

    I’ve been trying to save for a down payment for three years, and I’m still only up to about 10% of what a starter home costs in my area. The messed up thing is that a mortgage would be cheaper than the rent on my crappy apartment.

    Knowing that, there’s little incentive for me to wait. Sure, it would paint a prettier financial picture for me to wait until I have the 20%, but there’s a lot more that goes into this kind of decision than the raw numbers.

  30. Waiting patiently says:

    I know this is super old but this guy was a tool! (rolls-eyes) … Talking like everyone should make 6 figs and lives with mommy. Lucky you! It’s people like this that can’t understand the shape of the nation cause he’s too stuck seeing how it works for him and him alone.

  31. Megan says:

    It is actually very unrealistic for many people to save 20% for a home. Even a home at a measly 100,000 needs a $20,000 down payment. I don’t know about anyone else but as a one income family, we could never save $500 per month. We can barely pay the bills we have and we have no credit debt and can barely afford food, so eating out isn’t an option. The money we do save usually ends up going for car repairs or some other unforeseen expense. My husband and I are realistic that we will never own a home while our children are living under our roof. A 2 bedroom apartment is it for us.

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