The 20 percent rule, and why it matters
You need to put down 20 percent of the home's purchase price to avoid paying mortgage insurance. That is the threshold most lenders use. If you put down less, the lender requires you to carry mortgage insurance for as long as the loan exists — or until you build enough equity to remove it.
The reason is straightforward: mortgage insurance protects the lender, not you. If you default and the lender forecloses, the insurance covers part of their loss. The less money you have in the deal, the more risk the lender takes, and the more insurance they demand.
On a $300,000 home, 20 percent is $60,000. On a $500,000 home, it is $100,000. The exact amount depends on the purchase price of the specific property you are buying, not on income or credit score.
Key Takeaways
- A 20 percent down payment is the standard threshold to avoid mortgage insurance, though some loan programs allow you to skip it with less.
- Mortgage insurance costs 0.5 to 1.86 percent of your loan amount per year, depending on how much you put down and your credit score.
- You can remove mortgage insurance once you reach 20 percent equity through a combination of down payment and home appreciation, but the process varies by loan type.
- FHA loans, VA loans, and USDA loans have different insurance structures and do not follow the 20 percent rule.
What happens if you put down less than 20 percent
When you put down less than 20 percent, the lender adds private mortgage insurance (PMI) to your monthly payment. This is a separate line item on your mortgage statement, not part of your principal or interest.
The cost depends on two things: how much you put down, and your credit score. A borrower with a 740 credit score putting down 10 percent might pay 0.55 percent of the loan amount annually. The same borrower putting down 5 percent might pay 0.86 percent. A borrower with a 620 credit score putting down 10 percent could pay 1.86 percent or higher.
On a $400,000 loan with 10 percent down and a 740 credit score, PMI might run $220 per month. Over 10 years, that is $26,400 in insurance premiums — money that builds no equity and disappears when the insurance is removed.
How to remove mortgage insurance once you have it
You can remove PMI in two ways: reach 20 percent equity through payments and home appreciation, or request removal once you hit that threshold. The process depends on your loan type.
On a conventional loan, you can request PMI removal once you reach 20 percent equity. You will need a new appraisal to prove the home's current value, which costs $300 to $500. The lender will order the appraisal and remove the insurance if you meet their requirements. This usually takes 30 to 45 days after you submit the request.
Some lenders will remove PMI automatically once you reach 22 percent equity through a combination of payments and home price increases. Check your loan documents to see if automatic removal is included.
On an FHA loan, mortgage insurance cannot be removed, even after you reach 20 percent equity. You pay it for the life of the loan if you put down less than 10 percent. If you put down 10 percent or more, FHA insurance drops off after 11 years. This is a permanent cost difference between FHA and conventional loans.
Down payment amounts and insurance costs side by side
| Down Payment | Loan Amount (on $400k home) | Typical PMI Rate | Estimated Monthly PMI | Insurance Removable? |
|---|---|---|---|---|
| 5% | $380,000 | 0.80–1.86% | $253–$589 | Yes, at 20% equity |
| 10% | $360,000 | 0.55–1.25% | $165–$375 | Yes, at 20% equity |
| 15% | $340,000 | 0.50–0.80% | $142–$227 | Yes, at 20% equity |
| 20% | $320,000 | None | $0 | N/A |
These rates are examples based on conventional loans with a 740 credit score. Your actual rate depends on your lender, credit score, and the specific loan program. Ask your lender for a Loan Estimate, which shows the exact PMI cost for your situation.
When 20 percent is not the only option
Some borrowers use piggyback loans to avoid PMI without putting down 20 percent. A piggyback loan is a second mortgage taken out at the same time as your primary loan. For example, you might put down 10 percent in cash, borrow 80 percent as your main mortgage, and borrow the remaining 10 percent as a second loan.
This avoids PMI because the first mortgage is exactly 80 percent of the home's value. However, the second loan usually carries a higher interest rate than the first, and you make two separate payments. The math does not always work in your favor — sometimes paying PMI for a few years costs less than the extra interest on a piggyback loan.
FHA loans allow you to put down as little as 3.5 percent and avoid PMI, but they require mortgage insurance instead. FHA insurance is permanent if you put down less than 10 percent, making it more expensive over time than PMI on a conventional loan. VA loans and USDA loans have their own insurance structures and do not require PMI at all, but you must meet specific may be able to access requirements.
The real cost of putting down less than 20 percent
Putting down 10 percent instead of 20 percent on a $400,000 home means borrowing an extra $40,000. That extra $40,000 costs you interest over 30 years. Add PMI on top, and the total cost of that 10 percent difference can easily exceed $100,000 by the time you pay off the loan.
However, the alternative — waiting to save 20 percent — means renting longer and missing years of building equity through mortgage payments. Home prices and rents both rise over time. Buying sooner with 10 percent down and removing PMI in five to seven years can still leave you ahead of someone who waits three more years to save 20 percent.
The decision depends on your specific situation: how fast home prices are rising in your area, how quickly you can save, and whether you can afford the higher monthly payment with PMI included.
Frequently Asked Questions
Can I remove PMI before I reach 20 percent equity?
No. Lenders require you to reach 20 percent equity before removing PMI on a conventional loan. Some lenders will remove it automatically at 22 percent equity, but you cannot request removal before that point. FHA insurance cannot be removed at all if you put down less than 10 percent.
Does my credit score affect how much down payment I need?
Your credit score does not change the 20 percent threshold, but it does change the cost of PMI if you put down less. A higher credit score means lower PMI rates. A 760 score might pay 0.50 percent annually, while a 620 score might pay 1.86 percent for the same down payment amount.
What if my home increases in value — does that count toward the 20 percent?
Yes. If you put down 10 percent and your home appreciates 10 percent, you now have 20 percent equity. You can then request PMI removal with a new appraisal. However, you cannot rely on appreciation — it is not may provide, and waiting for it to happen means paying PMI longer.
Is there a down payment amount between 10 and 20 percent that makes sense?
15 percent is sometimes used as a middle ground. It reduces PMI compared to 5 or 10 percent, but requires less saving than 20 percent. Whether it makes sense depends on your timeline and how quickly you can reach 20 percent equity through payments alone.
Do all loan types follow the 20 percent rule?
No. Conventional loans use the 20 percent threshold. FHA loans use a different insurance structure. VA and USDA loans do not require PMI at all, but have their own may be able to access rules and guarantees. Ask your lender which rule applies to your specific loan program.