5% vs. 20% Down Payment

Name: Bridgepoint Funding, Inc.
Price range: $$$

December 2, 2025
Mike Trejo
Down Payment

The Myth of the “Required” 20 Percent Down Payment

For decades, many buyers have heard that they need a 20 percent down payment to buy a home. That idea once had some truth behind it, but it no longer reflects how most people purchase homes today. In California, where home prices often exceed $800,000 or even $1 million, putting down 20 percent would mean saving $160,000 to $200,000 or more.

Most buyers don’t wait that long. Many well-qualified borrowers purchase homes with as little as 3 to 5 percent down, thanks to flexible conventional and government-backed loan programs. The key is understanding the tradeoffs between a smaller down payment and a larger one — and deciding which approach aligns with your financial goals.

How Down Payment Amount Changes the Equation

Your down payment affects three main parts of your mortgage:

Loan size and monthly payment. A smaller down payment means borrowing more, which increases your loan balance and monthly payment slightly.
Mortgage insurance. Borrowers who put down less than 20 percent on a conventional loan pay private mortgage insurance (PMI). PMI protects the lender, but it can be removed once you reach 20 percent equity.
Liquidity and opportunity cost. The more you put down, the less cash you keep on hand. A large down payment might lower your payment, but it can also reduce your financial flexibility after closing.

Let’s look at how this plays out in real numbers.

California Example: 5% vs. 20% Down on an $900,000 Home

Here’s a simplified example using a $900,000 purchase price, typical for many parts of the Bay Area or Southern California.

Scenario	5% Down	20% Down
Down Payment	$45,000	$180,000
Loan Amount	$855,000	$720,000
Approximate Monthly Payment (Principal & Interest)*	$5,800	$4,900
Mortgage Insurance	Yes (temporary)	No
Cash Remaining After Purchase	More liquidity	Less liquidity

*Estimates based on a 30-year fixed loan at 6.75% interest. Payments will vary by credit score, loan type, and market conditions.

At first glance, the 20 percent down option looks better because it lowers your payment and eliminates mortgage insurance. But it also requires $135,000 more cash upfront. The question isn’t just what’s cheaper on paper, it’s what’s smarter for you financially.

When 5 Percent Down Makes More Sense

For many California buyers, a 5 percent down payment offers several advantages that go beyond just getting into a home sooner.

You Preserve Cash for Reserves and Flexibility. Buying a home involves more than the purchase price. You’ll need funds for moving, furnishing, and maintaining your property. If you put every dollar into your down payment, you lose flexibility. Keeping a healthy savings cushion helps you stay comfortable and confident after closing.
You Benefit from Market Appreciation Sooner. California home prices have historically appreciated faster than the national average. By buying sooner with a smaller down payment, you start building equity right away instead of waiting years to save the full 20 percent.
PMI Isn’t Permanent. Private mortgage insurance often costs between 0.3% and 1% of the loan amount per year. But it’s not a lifetime expense. Once you reach 20 percent equity, it can be removed without refinancing. For many buyers, PMI ends up lasting only a few years — often far less than the time it would have taken to save an extra $100,000 or more.
Interest Rates and Home Prices Can Change. While you’re saving for a larger down payment, interest rates or property values can increase. Even a 1 percent rise in rates can have a larger impact on your monthly payment than reducing your balance by a few percentage points. Buying sooner with a smaller down payment can protect you against future rate increases.

When 20 Percent Down Might Be the Better Choice

A larger down payment can still make sense for certain borrowers, especially those who have already built up equity or significant savings.

You Eliminate Mortgage Insurance. Avoiding PMI can save several hundred dollars per month. Over time, that adds up especially if you plan to stay in the home long-term and don’t anticipate refinancing soon.
You Lower Your Loan Balance and Monthly Payment. If you’re comfortable parting with the cash, a larger down payment creates a smaller loan balance, lower monthly payment, and reduced overall interest paid over time.
You May Qualify for Better Loan Pricing. Lenders often offer slightly lower interest rates or fees for borrowers with stronger equity positions. For jumbo loans, where underwriting is more stringent, a larger down payment can also help secure approval more easily.
You’re Buying a Long-Term Home. If this is your forever home and you plan to stay put for many years, maximizing your equity upfront can provide peace of mind and a sense of stability.

The Role of LTV and Credit in Deciding

Lenders evaluate every loan based on loan-to-value ratio (LTV) and credit profile. A 95 percent LTV (5 percent down) can still be viewed as a strong file if your credit, debt-to-income ratio, and reserves are solid.

For example, a borrower with a 760 credit score, low DTI, and several months of savings may qualify easily with 5 percent down. Another borrower with credit challenges or higher debts might choose 10 or 15 percent down to strengthen the overall profile.

The goal isn’t just to meet minimum requirements. It’s to find the right balance between approval strength and liquidity.

The Liquidity Factor: Why Cash on Hand Matters

Liquidity, the money you keep accessible after closing, plays a major role in long-term financial comfort.

Imagine two buyers:

Buyer A puts 20 percent down and has little savings left afterward.
Buyer B puts 5 percent down and keeps $100,000 in reserves.

Buyer B may have a slightly higher monthly payment but is better prepared for unexpected expenses, opportunities, or life changes. In a high-cost market like California, that flexibility often outweighs the difference in monthly payment.

Combining a Smaller Down Payment with Smart Financing

Even with 5 percent down, there are ways to reduce your payment or offset costs:

Seller credits can be used to cover closing costs or temporarily buy down your interest rate.
Lender credits can trade a slightly higher rate for reduced out-of-pocket expenses.
Temporary buydowns such as 2-1 or 3-2-1 structures can lower your payment in the early years.

These strategies help make a smaller down payment more comfortable while maintaining financial flexibility. Learn more in Using Seller Credits and Buydowns to Lower Cash to Close.

Understanding the Opportunity Cost of Waiting

For many buyers, the bigger question is not 5 percent versus 20 percent, it’s whether waiting to save more actually helps.

Consider a $900,000 home that appreciates at 4 percent per year. If you wait two years to save an additional $100,000 for a 20 percent down payment, that same home could cost nearly $975,000. Meanwhile, you’ve lost two years of potential equity growth, and your rent payments have gone toward someone else’s mortgage.

In many cases, buying sooner with a smaller down payment can lead to greater long-term wealth than waiting for the “perfect” time.

California’s Competitive Market Reality

In areas like the East Bay, Contra Costa County, or Orange County, multiple-offer situations are common. Many buyers using 5 percent down loans successfully compete with higher-down-payment offers when their files are well-prepared and fully preapproved.

Sellers increasingly value strong preapprovals and reliable lenders over down payment size alone. This is where working with a local mortgage broker who understands the market can make all the difference.

We go into more detail about the importance of preapproval in Down Payment: How Much Do You Really Need to Buy a Home?

Balancing Short-Term Comfort and Long-Term Goals

Choosing between 5 and 20 percent down isn’t just about qualifying for a mortgage. It’s about aligning your decision with your financial goals.

Ask yourself:

How much cash do I want to keep available after closing?
How long do I plan to own this property?
What’s more important to me? The lowest possible payment or maintaining flexibility?

Sometimes, the smartest choice is in between. A 10 or 15 percent down payment can strike the right balance between comfort and equity.

Key Takeaways

Most California buyers today put down less than 20 percent, many with strong credit qualify easily with 5 percent.
A smaller down payment can help you buy sooner, retain savings, and benefit from appreciation.
Mortgage insurance is temporary and often costs less than waiting years to save a larger down payment.
A larger down payment still makes sense if you have ample savings, plan to stay long-term, or want to avoid PMI entirely.
The best choice depends on your financial goals, reserves, and comfort level not a single “rule.”

The Bottom Line

Both 5 percent and 20 percent down payment strategies can be smart, depending on your situation. The real key is understanding how each option affects your payment, liquidity, and long-term goals.

In California’s competitive market, the right structure can help you buy sooner and start building equity without overextending yourself.

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