"I'll piggyback with this about PMI and why I prefer 5% down. (Conventional only.)
- 1. Housing prices are usually rising. Unless you think you can time a collapse, which are rare, you will pay more for your house in 2 years than you would now. I'll be using 250k/5% rate as my baseline housing price throughout this post. Putting 5% down costs you 12,500. Putting 20% down costs you 50,000. If you're buying in the 250k range there's a good chance that 37.5k could take another 2 years to save up for. At average growth rates in an average state, you're paying another 20k for that home in 2 years. Sweet, you saved 9-10k in MI payments and tacked on an additional 20k in PI. You might say that you pay less interest if you wait 2 years because you are financing less, even at the higher price. This is true, but if you really want to do that you just make curtailments every month with money you would have otherwise been saving for 20% down. Now you have the lower UPB, pay less interest, and payoff sooner. This vastly outweights that piddly MI.
2. Well Sardines, I got a nice inheritance so I can actually afford the 50k down payment, I should do it now right? Not if you don't need to! Financing at 5% means you pay 170k in interest life of loan and probably 9-10k in MI depending on the state. 180k of "wasted" money (ignoring tax goodness.) At 20% down you pay 143k in interest and 0 MI. Sweet, you saved 37k over 30 years. DO YOU KNOW HOW BAD THAT IS? If you put 37.5k into the market and got annual returns of 4% (bad) you'd make 80k in that same time frame. 80k > 37k. Also, you have access to that money, whereas if it's just in equity it's tougher to tap into. With average S&P returns you'd make over 150k more putting it into the market than your down payment.
3. What if another collapse happens? Well there's 2 scenarios. You keep your job and can wait it out, so your equity is irrelevant. What if you can't afford the house though? A lot of markets dropped 50% in the last collapse. Whether you put 5% or 20% down, most borrowers will be underwater. Do you want to lose 12.5k or 50k? Also! Guess what, we have our S&P investments. It sucks that it's likely down quite a bit, but if you can cash out and make your payments, you keep your home, which will someday get value back. Or you walk away from the home and still have money in the stock market. These are the biggies. Really, the only upside of putting 20% down is a lower monthly payment, but if the change in monthly payment from 5% to 20% impacts your ability to pay, you are buying outside of your means as it is. I guess if your credit is bad you'd need the 20%, but most people with bad credit aren't saving enough to put 20% down on a house. (Barring inheritance.)
4. So how did this myth start? Well it didn't used to be a myth. Interest rates used to be insane. I still see thousands of borrowers in the low 10s. Remember that 37k we "saved" earlier by putting down 20%? At a 7% interest rate that number is closer to 75k. At a 10% rate it's over 100k saved. Also, we're looking at a 70% payment different instead of a 20% one. Putting down 20% was good advice in times of high rates, but it's pointless now.
Source: I get paid to figure this stuff out."