Do you need 20 percent down? What changes above and below the line

What changes at 20 percent

The CFPB puts it plainly. The amount you need depends on the loan and the lender. A larger down payment generally means a lower rate and a better chance of approval. With less than 20 percent down, lenders usually require private mortgage insurance, or you use an FHA, VA or USDA loan.

So 20 percent changes three things:

• Mortgage insurance. A conventional loan at 80 percent loan-to-value or lower usually has none.
• Rate and fees. Pricing often improves with more equity.
• The size of the loan. A smaller loan means a smaller monthly payment and less interest over time.

It does not change whether you can buy. Conventional loans start at 3 percent down for eligible buyers, FHA at 3.5 percent, and VA and USDA can require nothing down.

How PMI ends on a conventional loan

For most conventional loans on a single-family principal residence that closed on or after July 29, 1999, the CFPB summarizes federal rules this way:

• By request at 80 percent. You can ask your servicer to cancel PMI on the date the balance is scheduled to reach 80 percent of the original value. You can ask sooner if extra payments get you there. Original value generally means the lower of the sales price and the appraised value at purchase.
• Automatically at 78 percent. The servicer must end PMI on the date the balance is scheduled to reach 78 percent, as long as you are current.
• At the midpoint. PMI must end the month after the midpoint of the loan's amortization schedule, which is 15 years on a 30-year loan, even if the balance has not reached 78 percent.

Requests to cancel come with conditions, such as a good payment history. The servicer may also require proof that the home's value has not fallen. FHA and VA loans follow different rules.

The case for keeping cash

Putting 20 percent down can leave you with nothing in the bank on the day you get the keys. The first months of owning often bring moving costs, a repair the inspection missed, furniture, and an escrow payment that rises at the first annual review. If you put every dollar into the house, any surprise goes on a credit card.

Time is the other cost. If saving another 15 percent will take four years, compare the mortgage insurance you would pay in the meantime with what happens to rents and prices while you wait. There is no single answer, but the comparison is easy to run.

Choosing your number

Ask a lender for two Loan Estimates on the same home: one with a small down payment and one at 20 percent. Compare the rate, the monthly mortgage insurance on page 2, and the cash to close. Then use the calculator to see when PMI could come off on the smaller down payment. Many buyers land in the middle. They put down enough to get a better price and keep enough cash to sleep at night.

The bottom line

Twenty percent is a pricing line, not a requirement. Below it you usually pay mortgage insurance, which on conventional loans ends on a schedule set by federal law. Choose a down payment that leaves you with reserves. You can always pay down the loan faster later. Getting cash back out of a house is much harder.