Down payments and PMI

The down payment is cash you put toward the price of the home at closing. A larger down payment means a smaller loan, and it can change which loan programs a lender will consider. It is separate from closing costs, which are the fees and prepayments due to complete the purchase.

Some loan programs allow a down payment well below 20 percent. Twenty percent is a common reference point because it is the usual threshold for avoiding private mortgage insurance on a conventional loan. It is not a rule that every buyer must hit.

If a conventional loan finances more than 80 percent of the home’s value, the lender often requires private mortgage insurance, or PMI. PMI protects the lender, not you, if the loan defaults. The premium is commonly added to the monthly payment.

On many conventional loans, PMI can be canceled once the balance reaches 80 percent of the original value, and lenders must drop it at 78 percent if payments are current, under federal rules for most borrower-paid PMI. The timing depends on the loan and on how the value is documented. Ask the servicer which rule applies to that note.

FHA loans use a mortgage insurance premium, not conventional PMI. Depending on the down payment and the term, that premium can last for the life of the loan or for a set number of years. VA and USDA loans have their own fee structures and eligibility rules.

A smaller down payment can make a purchase possible sooner. It also means more interest over time, a higher loan-to-value ratio, and, on many loans, an insurance premium. Those are the numbers to put next to each other before you decide.