What is the right size for a down payment?

Posted by  on Jun 05, 2012

Q: My wife and I have been saving money for a house and were wondering what the right amount for a down payment is. We have good credit, and it seems we can qualify for the best mortgage rates with 20 percent down, which is about what we've saved so far. I like the idea of saving more so we have more equity, making it less likely our mortgage will ever be "under water." My wife thinks we might as well take advantage of the low mortgage rates today, and put any additional amount we build up into a savings account. What are some pros and cons of these approaches?

A: A healthy down payment is a good idea, but 20 percent is already a significant amount of money to put down. To put this in perspective, average home prices in the U.S. are down some 35 percent from the 2006 peak, according to the S&P/Case-Shiller Home Price Index, but that's under a pretty extraordinary set of circumstances. Also, having an underwater mortgage is really only a concern if you plan to move again within a few years, or if you want to keep your options open to refinance. Today's mortgage rates are so low it would be hard to see a pressing reason to refinance in the near future.

As for your wife's logic of taking maximum advantage of low mortgage rates, the flip side of that is that savings account rates are also at extreme lows. By putting less into a down payment, you'd still be paying more in mortgage interest than you'd earn on the extra money you'd get from a savings account.

You and your wife should look at the 20 percent figure as a compromise. It is a healthy down payment, and the chief value of holding onto any further savings is to build up some liquidity to prepare for the unexpected -- something you are likely to become familiar with as homeowners.


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