Making a Down Payment on a House
Key takeaways
A down payment is the money that you pay upfront when buying a new house or condo.
You’ll likely pay it in two parts—first as an “earnest money” payment when you sign the purchase contract and the rest at closing.
Traditionally a down payment is 20 percent of your purchase price, but you may have other options.
Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.
Buying a home is a major step with a lot at stake financially, so it’s natural to be wary of the process. And thinking about writing that massive check for your down payment can be intimidating. So, we’re demystifying the ins and outs of the down payment so you can tackle this major purchase with confidence.
What is a down payment?
When you’re buying a home, the down payment is the money that you pay toward the purchase upfront. But with today’s elevated housing prices, it’s not always easy to have that much cash on hand.
Typically, the down payment is expressed as a percentage of the sale price. For example, a traditional 20 percent down payment on a $400,000 home is $80,000. Even if you’re aiming for a 10 percent down payment, you’re still looking at $40,000.
If you’re like most people, you’ll borrow the rest using a mortgage. The larger your down payment, the less you’ll need to borrow (and pay interest on).
How much do you need for a down payment?
Traditionally a down payment is 20 percent of your purchase price. With that level of equity, you present yourself as financially stable enough to be a serious buyer to sellers and bankers, and you avoid paying mortgage insurance.
If you put down less than 20 percent, you may have two options:
- The Federal Housing Administration (FHA) insures mortgage loans to help first-time homebuyers and borrowers who might not qualify for conventional loans. With this type of loan, your down payment may be as low as 3.5 percent of the home price. But you’ll pay a little more for mortgage insurance premium (MIP).
- If the down payment is less than 10 percent, this extra cost remains on your loan for life. (The only way to get rid of MIP in this case is to refinance the FHA loan into a non-FHA loan.)
- If your down payment was greater than 10 percent, MIP is automatically removed after 11 years.
- If the FHA isn’t involved in your loan, your lender may require you pay for private mortgage insurance (PMI). As the years go by and you achieve a certain amount of outright ownership, or “equity,” in your home, the lender must cancel the PMI.
Because many people today don’t have enough cash for a 20 percent down payment, there are other ways to make it work. Each mortgage company has its own set of criteria when it comes to the size of your down payment, credit history, assets and more. So be sure to shop around to find the mortgage terms that best meet your needs.
One source of money to jump-start your down payment could be the cash value of your permanent life insurance policy. If you bought a policy many years ago, it has been accumulating cash value. You can access the value for virtually any reason—and using it toward a down payment might make sense for you.1 Talk with your financial advisor about your options. (You’d pay interest on any loan you take from the policy until it was repaid. This may be an option if you need money temporarily for a down payment.)
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What’s the average down payment on a house?
The reality is that many people are getting close to the traditional 20 percent down payment, but first-time homebuyers are putting down only about half of that. According to data from the National Association of Realtors compiled in 2024:
- 9 percent down is the median for first-time buyers.
- 18 percent down is the median across all home buyers.
- 23 percent down is the median for repeat buyers.
The report explains that first-time buyers are using savings, loans or gifts from friends and family, their own financial assets, or inheritances to come up with the down payment.
It’s possible to access the money in a retirement account like your 401(k) by making an early withdrawal or by taking a 401(k) loan—but there are significant downsides, including interest, taxes and potential penalties. Since your 401(k) is meant to be money for retirement, withdrawing it should be carefully considered.
Do you have to make a down payment all at once?
Frequently, a down payment isn’t paid all at once. Instead, you’ll likely wind up paying it in two parts—first as an “earnest money” payment when you sign the purchase contract and then a final payment at closing.
The amount that’s paid out upfront in earnest money is a detail you’ll specify in advance in the purchase contact. If you’re buying an existing home, expect to shell out 1 to 3 percent of the purchase price in earnest money. Your realtor can help you with the norms in your market.
But if you’re having a home custom built for you, your earnest money payment will likely be much higher—up to 10 percent before the builder lifts a finger.
Where does your down payment go?
Your earnest money doesn’t go into the pocket of the seller straightaway. Instead, it goes into escrow. An escrow company or officer is a neutral third party who holds onto the payment until the deal is finalized. Then they get the money to the right place.
The rules regarding escrow accounts vary by state, and additional details may be spelled out in your purchase contract. Check with your agent to find out how and where your payments are being held.
What happens to your earnest money if you decide not to buy?
Sometimes, even after you and the seller sign a contract, the deal falls apart before closing, and you’ve still got money on the line. Your ability to reclaim your earnest money and other payments depends on local laws, contract terms and the reason the sale fell apart.
In most cases, a change of heart on your end means you’re going to lose your earnest money. But you may be able to get it back if:
- The seller decides to take the home off the market.
- You can’t get a mortgage that will allow you to buy the property.
- A home inspection turns up a major issue you didn’t know about.
- You change your mind about the sale within a predetermined time period.
Your contract should spell out the exact scenarios in which you will—and won’t—receive a refund if the sale falls apart. And your real estate agent can offer additional insight into the laws for your area.
Feel better about taking action on your dreams.
Your advisor will get to know what’s important to you now and years from now. They can help you personalize a comprehensive plan that gives you the confidence that you’re taking the right steps.
Find your advisorCan I change my down payment before closing?
Whether you got a cash windfall or the closing process is taking long enough that you've been able to save more, most lenders will allow you to make a larger down payment. This can be to your advantage because it lowers the amount you have to borrow and pay interest on. But if you’re looking to make a smaller down payment, you’ll need to check with your lender first.
Closing costs beyond the down payment
If you’re saving to buy a home, keep in mind that a down payment isn’t the only money you’ll need to pony up during the process. You’ll be hit with several other costs of buying a house, too.
For example, you may need to cover some upfront expenses for processing your mortgage application and hiring a home inspector. And closing costs and fees can be thousands of dollars.
Talk to an experienced agent and/or your preferred lender to get an estimate of what those bills will total, and be sure you include that amount alongside your down payment when calculating your savings goal.
How to save for a down payment on a house
Here are some of the steps to take to get started. They can help put you one step closer to your goal of home ownership.
1. Estimate your homebuying budget
Before you begin to save your down payment, you first need to figure out how much house you can realistically afford (based on your monthly mortgage payment) because that number will be used to calculate how large of a down payment you may need to save.
You’ll find several different general rules to determine the size of a home payment you’ll be able to make. Perhaps the most common is the 28/36 rule. This refers to the fact that most lenders prefer that you spend 28 percent (or less) of your gross monthly income on your housing expenses, including your mortgage, and 36 percent (or less) of your gross monthly income on your total monthly debt payments, including your mortgage.
A mortgage calculator can help you determine the monthly payment for different loan amounts and terms. Just remember, the cost of your mortgage, taxes, homeowner’s insurance and other fees like association dues are all added into the 28 percent.
2. Determine the price range you can afford
Once you’ve reviewed your budget, you can figure out your price range. If you plan to use the traditional guideline of 20 percent down and can save $80,000 for the down payment, you could look at homes in the $400,000 range. That would leave you with a $320,000 mortgage.
3. Decide when you want to buy a house
To figure out how much to save to achieve your ideal down payment, you’ll also need to have a purchase date in mind. Once you know when you want to buy your home, you can do some simple math to determine how much you need to save each month to hit your goal.
For example, let’s say that you run through the steps above and determine that you’d like to purchase a home valued at $400,000 in five years, and you’d like to put 20 percent down. That means you’d need to save $80,000 over the course of about 60 months (five years), or roughly $1,334 per month. (Note that this doesn’t include any interest payments on your savings or investment gains or losses should you choose to invest those dollars.)
On the other hand, let’s say that you have a three-year time frame. In this case, you’d need to save more than $2,222 each month.
Automation is a powerful tool. By automating your savings and adjusting your budget, you’ll be less tempted to spend it on other things. Eventually, you won’t miss it, and you’ll have the satisfaction of working toward your goal.
4. Where to put your money while saving for a home
You can be strategic about where you put the money you’re saving up. Think beyond a basic savings account. For example, your money could remain safe but grow faster in a high-yield savings account or in a certificate of deposit.
And an investment might also work, though your money would be subject to the ups and downs of the market. 2
Consider your larger financial plan
There’s a lot to consider when buying and making a down payment. If you don’t have a financial plan yet, buying a home is a great reason to start one. If you do, buying a home is a great reason to revisit it with your advisor.
Your Northwestern Mutual financial advisor can help you with questions about the financial aspects of buying a home, including helping you set up a saving plan for your down payment. Your advisor can also show you how your home fits into your larger financial plan. Buying a home is also a good time to look at whether you have enough life insurance and income protection should you ever get sick or injured and be unable to work.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
