If You Can’t Afford a 20% Down Payment, You Can’t Afford to Buy A Home

Photo of NextAdvisor contributing writer Bernadette Joy Photo courtesy of Bernadette Joy
Bernadette Joy firmly believes you shouldn't buy a home with any less than a 20% down payment.
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I wasn’t trying to start a debate—it’s just my honest opinion.

I was participating in a panel on personal finance when the moderator asked me what I thought about down payments on homes. I shared my view, which has been shaped by my own experiences: “If you can’t put 20 percent down on a 15-year fixed rate mortgage, then you probably can’t afford to buy a home.”

A reputable certified financial planner chimed in with his disagreement. He said you can qualify for a mortgage with as little as 3.5% down, and that 30-year mortgages are well within the norm. Oh, and by the way, who can afford a 20% down payment nowadays?

And therein lies the beauty of personal finance: the diversity of opinions. What he stated was indeed fact. Right now, interest rates on 30-year mortgages are at a record low. And yes, for a $200,000 home, putting down 20% means showing up with at least $40,000 in cold hard cash. That is absolutely an obstacle, especially for my generation riddled with student loan debt, credit cards, and the pressures of career, family, and saving for retirement. Most days, I’m just trying to keep it all together.  

I work really hard. My real estate agent, lender, and financial advisor all told me it was okay! I deserve to live in a nice home in a nice neighborhood. 

I hear you. I said the same things. But my unpopular opinion is informed by my own home buying mistakes. And learning from these mistakes ultimately allowed my husband and I to pay off our current home in five years, and become 100% debt free in our thirties.

Here’s why 20% works for me. 

With a Low Down Payment, We Bought Too Early

AJ bought his first home in 2009 in upstate New York, before we met. When we got married in 2011, he was excited to start our life together in a new city. This meant selling his home. Both of us, in our twenties, thought he had done great buying a house so young. Being a homeowner means you’re a responsible adult, right? And owning a home is wiser than renting, right?

Not in our case. AJ’s home turned out to be a financial burden. He hadn’t considered that he might move after only a few years. Because he bought his home with little money down, his mortgage payments during those first few years were mostly going toward interest and private mortgage insurance (PMI). He barely had any equity. On top of that, his seemingly great investment went down in value during the recession. We ended up paying $10,000 to sell the house. 

As we find ourselves in another economic downturn, it’s important to consider how long you plan to live in a home, and how much you’ll really build in equity versus paying mostly interest and PMI.

When you make a low down payment, or when you choose to finance over a long period of 30 years, you’ll spend years making mortgage payments before you gain any significant equity in your home. That’ll put you in a tough spot if you need to sell or your home value diminishes. 

We Let Peer Pressure From Well-Meaning Family and Friends Influence Us

AJ grew up in South Carolina, and I grew up in New York City. Yet despite the differences in cost of living, careers and decisions, we both watched our immigrant parents work well past their sixties. They couldn’t afford to retire, largely because they were still carrying those long-term mortgages they signed more than 20 years ago. Despite their experience, after we got married, they often asked us when we would buy a home, and what kind of home we would buy.

To be honest, I started looking at homes bigger and more expensive than we needed, because in part, I wanted to prove to our families that we were successful. However, buying that bigger, nicer home would also mean we would likely have to work past retirement. AJ and I decided that we did not want that for our future. We kept our plan to ourselves, realizing we didn’t always need the family’s stamp of approval on our financial choices.

We Almost Bought What the Bank Told Us We Could Afford

We took a leap of faith in 2013 to move to Charlotte, North Carolina from New York City—home prices being the main influence. Less than a year after moving, we started looking for our first joint home. We were prequalified for at least $200,000 and as much as $400,000, but we didn’t have $40,000 in cash for a 20% down payment. 

What we did was unorthodox to our friends and family. Instead of buying the larger, dreamier 4-bedroom house that the bank said we could afford, we bought a smaller 2-bedroom townhouse for half the price. Why? Because we could put 20% down with a 10-year mortgage at that price point. Was this $101,000 home our perfect, forever home? Of course not. But it was good enough for what we needed, we could afford a 20% down payment of $20,000, and it allowed us to focus on saving for other goals like graduate school and retirement. Crucially, we knew we could still pay the mortgage even if one of us lost our jobs.

Putting down 20% means you have a real stake in your home from the very beginning. And because we chose a 10-year mortgage term, it meant that a bigger portion of our monthly payments was going toward the principal of our loan, rather than the interest. Shorter mortgage terms come with higher monthly payments, but even those higher payments were within our budget, thanks in part to our hefty down payment. Plus, shorter mortgages tend to come with lower interest rates.

Here’s an example. On a $250,000 loan, a 30-year mortgage at a 3.17% interest rate would come with an additional $154,350 in interest over the course of the loan. A 10-year mortgage at a 2.77% interest rate would come with an additional $40,749 in interest over the course of the loan.

That’s a difference of over $113,000 in interest. Who wants to pay that?

We Underestimated the Benefits of Building Financial Discipline

Yes, saving a 20% down payment with a shorter mortgage meant more money up front and a higher monthly payment than if we had gone for a traditional 30-year mortgage. And it meant buying a home that was less expensive than what our parents and lenders expected. But AJ and I learned how to live well within our means, and to keep our spending consistent, even with increases in our income over the years. Saving for big goals like a big down payment has a funny way of cultivating good spending habits.

The New Yorker in me is a lover of all things fashion. When we first moved to Charlotte, shopping was my way of dealing with homesickness. However, when we decided to save up for our first down payment together, suddenly a new pair of shoes didn’t feel as important as having a place to call our own. Nowadays, I live dangerously close to our city’s best mall. I still buy new clothes from time to time, but the voice in my head is still there, asking me if I really need something new, or if I’d rather save for something bigger and better.

We’ve since sold that first home and moved into a bigger home that is now 100% mortgage free thanks to the habits we formed. We are also now saving to buy our next home—with a 20% down payment, and without having to take a single penny of equity from our current home. With a debt-free home, I’ve had the freedom to max out retirement savings, start a new business, and spend on things I enjoy, without the financial stress people with mortgages are feeling right now.

Personal finance is indeed personal, so even if after you read this, you decide to go buy a home in a different way, that is 100% okay. Just know that for all the different (and often unsolicited) advice you will get in home buying, only you can decide how you want to live and how you will finance those choices.