Down Payments: How Much Should you Put Towards them?

This article has been updated for the 2023 and 2024 tax years. A down payment on a home mortgage is serious business. The term “mortgage” originated in France with the meaning of “death pledge”, after all. Quite literally, for many people, once they take a mortgage on, they’ll carry it to their death.

I’ve read dozens of retirement stories lately where the retiree is still paying off a mortgage. As a side note, if you still have a mortgage, you should not be retiring. Numbers-wise, I suppose you could, but you are rolling the dice if you think a cushy pension will continue uninterrupted to allow you to do so…

down payment

But let’s not jump too far ahead of ourselves. For beginners who have not bought a house, what is a down payment, you ask? A down payment is the amount of money you apply directly towards a loan – in the case of a home, a mortgage.

The average down payment on mortgages for first-time home buyers is about 6%.

But, is average good enough?

20% Down Payment Avoids PMI

Let’s start with this. One of the biggest financial mistakes I’ve made was buying a big house almost right after graduation and over-financing it.

You can avoid PMI (private mortgage insurance) – which is where your lender literally charges you to pay for the insurance that covers their ass if you default on your loan – by putting 20% down on a house.

My wife and I, unfortunately, hit ourselves with a double whammy. First, we didn’t have any savings to put towards the down payment. Second, we bought too much house.

No savings meant we had to either take PMI or a second (piggyback) loan. Crunching the numbers led us to take out a HELOC at a 9% APR (prime rate plus a few percentage points) instead of PMI. We were paying over $1,000 a year in interest on this second loan, and it all could have been avoided if we had first saved up 20% for a down payment.

I’m not sure if piggyback loans or PMI are as common place today as they were pre-financial collapse, but they are both traps. Which brings me to my first piece of advice: Don’t put less than 20% towards a down payment on a mortgage.

Nobody NEEDS a home, and if you can’t save up at least 20%, you are not ready for one. Stick with renting.

This, believe it or not, is my “soft” view on down payments.

At Least 50%, Why Not 100%?

The percentage rate you pay on a mortgage is an annual percentage rate. This means that you pay that interest rate every month (annual percentage rate/12) on whatever the remaining balance is. If you’ve never seen an amortization table, take a look. It will make you sick.

On a $200,000, 30-year loan at 7% interest, you would pay over $13,000 in interest for each of the first 6 years. Over 85% of your payment would go towards interest payments while the rest would go towards your loan principle. Over the course of the lifetime of the loan, you would pay over $279,000 in interest, more than the original value of the original home.

7% guaranteed returns should beat inflation, convincingly. While you might be able to do better investing, that is nothing to scoff at.

If I could go back and do it all over? I’d probably put at least 50%, maybe even 100% down towards a home purchase. In some parts of the country, this would be almost impossible. In Michigan? It’s not.

Realtors and bankers are going to hate me for saying that, but the bottom line is that the more you save towards a down payment, the sooner you’ll be 100% debt free. And the more secure you are from foreclosure and financial hardship. There are always exceptions out there, and local real estate markets might make buying/loan much more appealing than renting. But if you want a general rule, there it is.

Oh, but what About the Mortgage Tax Deduction?!

Whenever someone talks about deducting mortgage interest on a tax return as a blessing or a reason to buy a home, I cringe.

You can’t add a mortgage interest deduction on top of a standard tax deduction. For example, with the Republican tax reform implemented in 2018, the standard deductions are:

2023 standard deductions:

  • $13,850 for single filers
  • $13,850 for married, filing separately
  • $27,700 for married filing jointly
  • $20,800 for head of household

2024 standard deductions:

  • $14,600 for single filers
  • $14,600 for married, filing separately
  • $29,200 for married filing jointly
  • $21,900 for head of household

In my mortgage tax deduction breakdown article, I highlighted a common scenario where you could end up paying $14,000 (mortgage interest + property taxes) that you’ll never get back, while still ending up about $14,000 in itemized deductions short of breaking even versus simply claiming the standard deduction. There’s a reason why almost 90% of filers take the standard deduction these days.

So, there you have it.

Down Payment Discussion:

  • How much do you think one should put towards a down payment?
  • How much did you put towards yours?

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