For many first-time homebuyers, it can be tricky to figure out the best down payment amount for them. I was recently speaking with a couple in Massachusetts who decided to use their minimal emergency reserves to come up with less than 5% of the purchase price of their home as a down payment. On the other end of the spectrum, I see many debt-averse investors who want to save 50-100% of the purchase price to put down. This is how first-time homebuyers can figure out how much they should invest as a down payment.
Risk Tolerance Determines How Much Leverage You Are Willing To Take On
Financial leverage involves taking on debt to purchase an asset. In positive markets, this can be advantageous. If you put $100,000 down on a $500,000 home and the value immediately increases to $610,000, you can sell it and have $210,000 in the bank, not considering taxes and transaction costs. The home itself only increased in price by 22% but you received 110% on your investment.
In negative markets, this can be difficult to weather. If you put that same $100,000 down on a $500,000 home and the value decreases to $390,000, you owe more on the home than it is worth, and you’ve lost your entire investment plus 10% if you immediately sell, not considering taxes, transaction costs, and the option to default on your loan.
This negative scenario is exactly what we saw in 2008. People put small down payments on homes and when the values decreased, the homeowners were underwater. That, combined with variable-rate loans which skyrocketed loan costs, led to many homeowners defaulting on their loans and causing banks to foreclose on the properties.
If you are bullish on the housing market, find high risk levels acceptable, and can get a loan with a minimal down payment amount, you may want to consider a low down payment amount.
Don’t Use All Of Your Savings
For first-time homebuyers, realtors and loan officers may look at all your financial assets and offer you the maximum loan size available using all or most of your savings as a down payment.
In addition to the down payment amount, you need sufficient cash to cover:
- Emergency reserves in case of sudden unemployment or another unexpected event
- Loan closing costs
- Moving costs
- Whatever work may need to get done (painting, plumbing, HVAC, etc.)
- Furniture costs
If you are looking at a competitive market, homes may sell for prices above market value. Banks will not offer loans for prices above market value, which means you would need to come up with extra cash to cover the difference in addition to the down payment,
I’ve lived in the San Francisco Bay Area, San Diego, and New York and have seen this phenomenon over the last 10 years in all these cities plus the surrounding areas.
Basically, moving is more cash intensive than you might think and you do not want to find yourself in a position where you’re stuck because you’ve already pledged all your savings toward the down payment.
Your Budget Or Income Level Could Be A Limiting Factor
At the end of the day, you may need to come up with a large down payment to reduce your loan size so that you can align with your budgetary restrictions. Banks will not offer loans where your current income cannot support the ongoing payment amounts, unless you have a cosigner who is willing to take financial responsibility for the difference.
Interest Rates Aren’t Forever, But You Should Be Aware Of Opportunity Cost
“Date the rate, marry the house,” is a common adage among realtors and loan officers alike. The phrase arose because interest rates can change and opportunities to refinance and pay a lower rate down the road may crop up, but you can keep your home regardless of that interest rate.
Today’s interest rate environment is much higher than the environment of 10 years ago, but some buyers from the last three to five years are finding that they can reduce the monthly costs of maintaining their loan. Refinancing isn’t free though, and many people pay significant costs to do so or increase the amount owed on their home.
You also shouldn’t take on a loan knowing that it’s going to be a financial struggle today while hoping interest rates will go down. It is not guaranteed that interest rates will reduce, and certainly not to the levels they were in the late 2010s.
Example: Allie Versus Carla
In this example, we will put together all the considerations in determining down payment amount with two investors with considerably different factors impacting the prospective size of their down payment. Both investors have $200,000 in savings and mortgage interest rates are 5%.
Here is investor Allie’s profile:
- Occupation: Law firm partner
- Income: $500,000 per year
- Risk tolerance: Aggressive
- Outlook on housing market: Bullish
- Purchase goal: Buy a $1M metropolitan townhome in neighborhood expected to increase significantly in value, sell home in 5 years to move to the suburbs.
Here is investor Carla’s profile:
- Occupation: Small business owner
- Income: Varies between $100,000-$350,000 per year
- Risk tolerance: Moderate
- Outlook on housing market: Lightly bearish in the short term but bullish in the long term
- Purchase goal: Buy a $600k-$1M home in the suburbs in a good school district to live in for at least the next 20 years.
For Allie, it makes sense to put the least amount down and take a loan for the most amount she can. She has the income to support a large loan, she believes the home will be a five-year investment, she has a high tolerance for risk, and she is bullish on the housing market. If a loan officer will allow her to put down $25,000-$50,000, I would encourage it based on this profile.
Carla is a different story. She has a variable income, which would make it difficult to support a large loan with a significant monthly payment. Even the top of the range seems like a stretch because her housing costs could be over $5,000 per month all in, between loan interest, taxes, and insurance. I would encourage her to seek a smaller loan for a greater down payment amount based on her profile. Maybe she puts more like $180,000 down on a $600,000 home to keep her monthly costs below $3,000.
Consult A Mortgage Specialist, Your Realtor, And A Financial Professional To Arrive At The Right Down Payment Amount
The right balance depends on your personal and financial situation. Consult a financial planner to align your budget, goals, and risk tolerance. Speak with a mortgage specialist to determine what you qualify for and your price range. Consider working with a qualified realtor to find suitable homes and compare options.
Ultimately, there’s no one-size-fits-all solution. The right down payment amount depends on your risk tolerance, income, financial stability, and long-term goals. By balancing leverage, liquidity, and affordability—and seeking guidance from trusted professionals—you can choose a strategy that supports your homeownership aspirations and overall financial goals.
The subject matter discussed in this article is for informational purposes only. It is not intended and should not be relied upon as investment, financial, legal or tax advice and does not constitute an offer, recommendation, or solicitation. Securities offered through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-8943640.1 (5/26)(exp. 5/30)