Real Estate: $30K Falls Short of 20% Down Payment—Why?

The third quarter of 2023 saw a surge in down payments for homes, hitting a record high, as per a Realtor.com report. On average, Americans are now placing down payments of 14.7%, with a median payment of approximately $30,000.

Danielle Hale, Realtor.com’s chief economist, identified a couple of driving forces behind this rise. Firstly, the scarcity of homes available for sale keeps the housing market fiercely competitive. To stand out in offers, buyers are opting for larger down payments.

Another compelling reason for the uptick in down payments is their impact on reducing the monthly burden of mortgage payments. Hale pointed out that placing more money upfront translates to borrowing less. Given the current mortgage rates holding steady around 7%, the cost of borrowing for a home has more than doubled since January 2022.

Navigating the housing market has become a strenuous journey for many prospective homeowners due to inflated prices, depleted inventory, and surging interest rates. Amidst these challenges, down payments have also significantly increased.

According to advice from The Motley Fool, a commonly recommended practice is placing a 20% down payment when securing a conventional mortgage. Falling short of this threshold results in private mortgage insurance (PMI) expenses.

PMI is a safeguard for the lender if you take out a conventional loan with less than a 20% down payment. It doesn’t protect you as the borrower, as highlighted by the Consumer Financial Protection Bureau (CFPB). However, this additional insurance expense adds to the already high mortgage and home prices.

Despite this, a significant number of buyers find themselves compelled to opt for PMI. Even with an average down payment of $30,400, which represents 14.7% of the closing amount, it falls short of the mark needed to bypass PMI, as noted by The Motley Fool.

This could potentially bind buyers to pay PMI for an extended duration, adding to the overall expense and making homeownership even more challenging to sustain. According to Chase Bank, PMI costs range from 0.22% to 2.25% of the mortgage, depending on both the total loan amount and the borrower’s credit score.