Home guide
Is it worth saving longer for a bigger down payment?
Twenty percent avoids mortgage insurance, and that is worth real money. Whether it is worth waiting three years for depends on what the insurance actually costs, when it stops, and one FHA rule that changes the answer entirely.
The advice to put 20% down is old, widely repeated, and not wrong — it avoids mortgage insurance and lowers the loan. The question it never answers is whether 20% is worth waiting for, and that depends on numbers you can actually compute.
What the smaller down payment costs
On a $400,000 home at 6.5% over 30 years, using representative private mortgage insurance rates:
| Down payment | Loan | LTV | PMI rate | PMI/month | P&I |
|---|---|---|---|---|---|
| 5% | $380,000 | 95% | 0.78% | $247 | $2,402 |
| 10% | $360,000 | 90% | 0.52% | $156 | $2,275 |
| 20% | $320,000 | 80% | none | $0 | $2,023 |
So 5% down costs $247 a month in insurance that buys you nothing. But note the word month — it is not permanent.
Under the Homeowners Protection Act, PMI on a conventional loan must be terminated automatically once the balance reaches 78% of the original value, and you can request cancellation at 80%. On that 5%-down loan, scheduled payments alone reach 80% at month 124 and 78% at month 135.
Total PMI paid over that period: roughly $33,345.
That is the real figure to weigh — not $247 a month forever, but about $33,000 over eleven years, and less than that if you pay ahead or ask at 80%.
The buy now or save calculator puts the two paths on one timeline, including what the house costs by the time you have saved the larger deposit.
The FHA rule that changes everything
If you are considering an FHA loan to get in with 3.5% down, there is a rule here that catches a great many borrowers, and it works nothing like conventional PMI.
FHA's annual mortgage insurance premium duration is fixed by your loan-to-value at origination, and paying the balance down does not end it:
- Original LTV at or below 90% (so 10% down or more): the annual MIP is assessed until the end of the mortgage term or for the first 11 years, whichever comes first.
- Original LTV above 90% (which includes the 3.5%-down minimum): the annual MIP is assessed until the end of the term or for the first 30 years, whichever comes first.
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This single rule is often worth more than the rate difference between FHA and conventional, and it is rarely what the conversation is about.
The costs of waiting
Saving from 5% to 20% on a $400,000 house means finding another $60,000. Three years is a fast pace for that. In those three years:
- You pay rent, which builds nothing.
- The target moves. If the house appreciates, 20% of a larger number is more than $80,000, and you are chasing.
- Rates may move in either direction, and you have no control over which.
- You keep the money liquid, which is a genuine advantage and the one most often left out. $80,000 in the house is $80,000 you cannot reach.
Against that, a 20% down payment saves you the PMI, lowers the loan by $60,000, and usually earns a slightly better rate.
Where the answer usually lands
- If the market is flat or falling, waiting and saving is strong. The target is not moving and you avoid the insurance entirely.
- If the market is rising faster than you can save, buying sooner with PMI usually wins — $33,000 of insurance is less than three years of appreciation on a $400,000 house in a decent market.
- If you would be buying FHA at the minimum down payment, weigh very carefully. Insurance for the term of the loan is a different proposition from insurance for eleven years, and getting to 10% down changes it.
- If waiting would leave you with no cash buffer at closing either way, the down payment size is not the binding problem.
What to ask
- What PMI rate am I actually quoted? It varies with credit score, LTV and insurer, and a generic table is a starting point only.
- When does it come off, in months? Ask for the date the balance hits 80% and 78% of the original value.
- Is this FHA or conventional? Then ask how long the mortgage insurance lasts. The answers are structurally different.
- What does the house cost if I wait three years? Use a realistic appreciation rate for your market, not zero.
- Would 10% down, rather than 20%, get most of the benefit? Often it does — it halves the PMI rate and, on FHA, cuts the insurance from 30 years to 11.
Twenty percent is a good target. It is rarely a good reason to spend three more years renting.
Sources: FHA annual MIP durations quoted from HUD Mortgagee Letter 2013-04. Conventional PMI termination from CFPB on removing PMI, implementing the Homeowners Protection Act of 1998. Payment, PMI and amortization figures computed with this site's own code.