Down Payment Options: Trade-Off Guide

Bigger Down Payment Is Not Always Optimal

Compare liquidity, payment reduction, and opportunity cost.

Comparison Inputs

Input	Why It Matters
Cash reserve after close	Protects against forced debt use
Payment reduction impact	Improves monthly flexibility
Mortgage insurance effect	Changes total ownership cost
Opportunity cost	Capital deployment alternatives

Choose the structure that preserves resilience, not just minimum monthly payment.

$381

Monthly savings: 10%→20%

120 mo

Break-even at $450K

$45K

Extra cash 10%→20%

3–6 mo

Reserve target after close

Monthly Total (P+PMI) by Down Payment — $450K, 7% rate

3.5% FHA

$3,038

5% Conv.

$2,982

10%

$2,776

20%

$2,395

Down Payment Comparison at $450K Purchase (Approx., 7% Rate, 30yr Fixed)

Down Payment	Amount	LTV	PMI Est.	P&I Monthly	PMI Monthly	Total P+PMI
3.5% (FHA)	$15,750	96.5%	FHA MIP ~$155/mo	~$2,883	+$155	~$3,038
5%	$22,500	95%	~$180/mo	~$2,802	+$180	~$2,982
10%	$45,000	90%	~$115/mo	~$2,661	+$115	~$2,776
20%	$90,000	80%	None	~$2,395	$0	~$2,395

Going from 10% to 20% on a $450K purchase eliminates ~$115/mo PMI and reduces P&I ~$266/mo — total monthly savings ~$381. Break-even on the extra $45K deployed: approximately 120 months (10 years). Model your specific break-even before choosing a structure.

Textbook Field Notes

Down Payment Strategy Lab

Instructor Note: Bigger down payment is not always optimal. Compare the payment reduction, PMI elimination, and the opportunity cost of deploying more cash. Liquidity after close is often worth more than marginal monthly savings.

Breakout Exercise: Down Payment Break-Even Worksheet

Compute your break-even for moving from 10% to 20% by dividing the extra cash required by the total monthly savings (PMI eliminated plus P&I reduction). If the break-even horizon exceeds your expected hold period, the larger down payment may not be the best use of capital. Document this calculation before committing to a down payment structure.

Always model cash reserve remaining after close — target at least 3–6 months of total expenses.
Factor in PMI removal triggers: conventional PMI typically drops at 20% equity via payment or a new appraisal.
Compare FHA MIP versus conventional PMI at your specific credit score — FHA MIP can be more expensive for buyers with strong credit.

Reserve Warning: Do not drain emergency reserves to hit a round-number down payment. Unexpected repair costs in the first 12 months of ownership are common — cash flexibility protects you when they arrive.

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Cross References

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