3% Down vs 20% Down: Which Home Purchase Strategy Actually Saves You Money?

For years, the conventional wisdom was simple: save 20% down to avoid PMI and get the best mortgage terms. But here’s what nobody tells you—waiting five extra years to save 20% down might cost you more money than just buying now with 3% down and paying PMI.

I learned this lesson the hard way when I spent three years religiously saving for a 20% down payment while home prices in my market rose 8% annually. By the time I had my 20% saved, the homes I was looking at cost $80,000 more—and my “savings” on PMI was wiped out by appreciation I missed.

Let me break down the real math behind 3% down vs 20% down so you can make a smarter decision based on your situation—not outdated rules from a different housing market.

The Traditional 20% Down Argument

The standard advice goes like this:

• No PMI required ($100-$300/month savings)
• Better interest rates (lower loan-to-value ratio)
• Immediate equity protects against market downturns
• Smaller loan amount means less interest paid over 30 years

All of these points are technically true. But they ignore two critical factors: opportunity cost and home price appreciation.

The 3% Down Reality

Here’s what most financial advisors don’t tell you about low down payment strategies:

• Get into the market sooner and start building equity now instead of renting
• Capture appreciation while saving for a larger down payment
• PMI is removable once you reach 20% equity through payments and appreciation
• Keep cash liquid for emergencies, home repairs, and life expenses

For many buyers—especially first-time buyers in appreciating markets—3% down is the smarter financial move even with PMI.

Real-Life Example: 3% Down vs 20% Down on a $400,000 Home

Let’s compare two scenarios with actual numbers:

Scenario A: Buy Now with 3% Down

• Purchase price: $400,000
• Down payment: $12,000 (3%)
• Loan amount: $388,000
• Interest rate: 6.75% (estimated)
• Monthly payment (P&I): $2,517
• PMI: $250/month
• Total monthly payment: $2,767
• PMI removal: When loan balance reaches $320,000 (approximately 7-8 years)

Scenario B: Wait 3 Years to Save 20% Down

Assume 6% annual appreciation and continued rent at $2,200/month:

Year 3 home price: $476,000 (6% annual appreciation)

• Down payment needed: $95,200 (20%)
• Loan amount: $380,800
• Interest rate: 6.50% (slightly better with 20% down)
• Monthly payment (P&I): $2,408
• PMI: $0
• Total monthly payment: $2,408

The Surprising Math

Scenario A (3% down now):

• 3 years of payments: $99,600 (36 × $2,767)
• Principal paid down: ~$19,000
• Home value after 3 years: $476,000
• Equity after 3 years: $107,000 ($12,000 down + $19,000 principal + $76,000 appreciation)

Scenario B (20% down later):

• 3 years of rent: $79,200 (36 × $2,200)
• Additional savings needed: $83,200 ($95,200 - $12,000 already saved)
• Total cash outlay: $162,400
• Home value: $476,000
• Equity after 3 years: $95,200 (just the down payment)

Result: Buying with 3% down left you with $107,000 in equity vs $95,200 if you waited—even after paying PMI and higher monthly payments.

When 3% Down Makes Sense

1. You’re in an Appreciating Market

If home prices are rising 4-6% annually, every year you wait to save 20% down costs you more in appreciation than you save on PMI.

2. You’re Currently Renting

If your rent is close to what your mortgage payment would be (including PMI), you’re throwing away money on rent while saving for a down payment. Buy now and start building equity.

3. You Have Strong Income Growth Potential

If your income is increasing, you can accelerate principal payments and remove PMI faster than expected. Many buyers reach 20% equity in 5-7 years instead of 10+.

4. You Have Stable Emergency Reserves

Keeping cash liquid for emergencies, home repairs, and life expenses is often smarter than tying everything up in a down payment.

When 20% Down Makes Sense

1. Home Prices Are Flat or Declining

If home prices aren’t appreciating, there’s less urgency to buy immediately. Saving 20% down eliminates PMI and reduces your monthly payment without missing appreciation.

2. You’re Buying at the Top of Your Budget

If you’re stretching to afford a home with 3% down, adding $200-$300/month in PMI might push your budget too far. A larger down payment reduces monthly costs and financial stress.

3. You Have the Cash Ready Now

If you already have 20% saved without depleting emergency funds, putting it down eliminates PMI and gives you the best possible rate and terms.

4. You Plan to Stay Long-Term (10+ Years)

Over a 30-year timeline, avoiding PMI and paying less interest with 20% down adds up to significant savings—if you’re not sacrificing years of appreciation to get there.

How PMI Actually Works (And When It Goes Away)

Private Mortgage Insurance (PMI) protects the lender—not you—if you default on your loan. It’s required on conventional loans with less than 20% down and typically costs 0.30% to 1.50% annually of your loan amount, depending on your middle credit score and down payment size.

PMI Cost Examples

• 3% down, 680 credit: ~1.20% annual ($388,000 loan = $388/month)
• 5% down, 720 credit: ~0.80% annual ($380,000 loan = $253/month)
• 10% down, 740 credit: ~0.50% annual ($360,000 loan = $150/month)

How to Remove PMI

You can remove PMI once you reach 20% equity through:

1. Scheduled removal: PMI automatically cancels when your loan balance reaches 78% of the original home value (usually 11+ years on a 30-year mortgage)

2. Requested removal: You can request PMI removal once your loan balance reaches 80% of the original home value (typically 8-10 years)

3. New appraisal: If your home appreciates significantly, you can pay for a new appraisal ($400-$600) to prove you have 20%+ equity and request early PMI removal

4. Refinance: Refinancing to a new loan once you have 20% equity eliminates PMI entirely—though you’ll pay closing costs

In appreciating markets, many buyers remove PMI within 5-7 years instead of waiting 10+ years.

The Hidden Benefits of 3% Down

1. You Keep Cash Liquid

Real-life example: When I bought with 3% down, I kept $68,000 in savings instead of putting it all toward 20% down. Six months later, my HVAC system died ($8,000 replacement). Because I had cash reserves, I didn’t have to tap a HELOC or credit cards.

2. You Can Invest the Difference

If you’re disciplined, you can invest the difference between 3% and 20% down in index funds or retirement accounts. Over 30 years, that $68,000 invested at 8% annual returns grows to $682,000—far more than PMI costs.

3. You Start Building Equity Immediately

Every mortgage payment includes principal that builds equity. Renters build zero equity. Even with PMI, homeowners build wealth while renters don’t.

4. You Lock In Today’s Prices

If home prices rise 6% annually and you wait three years to save 20% down, the home you want today will cost $76,000 more—wiping out any PMI savings.

First-Time Buyer 3% Down Programs

Several programs make 3% down accessible for first-time buyers:

Fannie Mae HomeReady (3% Down)

• Credit requirement: 620+
• Income limits: Varies by county
• Flexible income sources: Accept non-traditional income
• PMI: Required until 20% equity

Freddie Mac Home Possible (3% Down)

• Credit requirement: 660+
• Income limits: 80% of area median income
• First-time buyer friendly: Designed for new buyers
• PMI: Required until 20% equity

Conventional 97 (3% Down)

• Credit requirement: 620+
• No income limits: Available to all qualified buyers
• PMI: Required until 20% equity

Connect with verified purchase loan officers through Browse Lenders to compare 3% down program options and determine which offers the best terms for your situation.

The Middle Ground: 5-10% Down

If 3% feels too risky and 20% feels too far away, consider the middle ground:

5% Down Benefits

• Lower PMI than 3% down (often 30-50% less)
• Better rate pricing than 3% down
• Still accessible for most first-time buyers
• PMI removal in 7-9 years with normal appreciation

10% Down Benefits

• Significantly lower PMI (often 60-70% less than 3% down)
• Best conventional rates without jumping to 20%
• PMI removal in 4-6 years with normal appreciation
• More equity cushion if market softens

For many buyers, 5-10% down offers the best balance between accessibility and long-term cost savings.

Common 3% Down Myths (Debunked)

Myth 1: “You’ll be underwater if the market drops”

Reality: Even with 3% down, most buyers build equity faster than markets decline. And if you’re buying a home to live in (not flip), short-term market fluctuations don’t matter—you’re building wealth over 10+ years.

Myth 2: “PMI is throwing money away”

Reality: PMI enables you to buy a home now instead of waiting years. The opportunity cost of missing appreciation usually exceeds PMI costs—especially in hot markets.

Myth 3: “Lenders don’t like 3% down buyers”

Reality: Fannie Mae and Freddie Mac explicitly support 3% down programs for qualified buyers. Lenders approve these loans every day—as long as you meet credit and income requirements.

Myth 4: “You need perfect credit for 3% down”

Reality: You need 620+ credit for most 3% down programs—not perfect credit. A 680 score qualifies for competitive rates with 3% down.

How Credit Scores Affect 3% Down vs 20% Down

Your middle credit score affects both your interest rate and PMI costs with low down payments.

PMI Pricing by Credit Score (3% Down)

• 760+ credit: ~0.60% annual PMI
• 740-759 credit: ~0.80% annual PMI
• 720-739 credit: ~1.00% annual PMI
• 700-719 credit: ~1.20% annual PMI
• 680-699 credit: ~1.40% annual PMI
• 660-679 credit: ~1.60% annual PMI
• 620-659 credit: ~2.00% annual PMI

A 60-point difference in credit score can double your PMI costs. If your score is below 700, improving it before applying for 3% down can save $100-$200/month.

Final Thoughts: Choose Strategy Based on Your Market and Timeline

There’s no universal “right answer” to 3% down vs 20% down—it depends on:

• Your local market: Appreciating vs flat/declining
• Your timeline: How long will it take to save 20%?
• Your rent costs: Are you throwing away $2,000/month while saving?
• Your career trajectory: Is your income growing?
• Your risk tolerance: How comfortable are you with PMI?

For most first-time buyers in appreciating markets, 3% down is the smarter move—even with PMI—because the opportunity cost of waiting years to save 20% exceeds PMI costs over time.

But if you’re buying at the top of your budget, home prices are flat, or you already have 20% saved, putting it down eliminates PMI and reduces long-term costs.

Connect with verified purchase loan officers through Browse Lenders to model 3% down vs 20% down scenarios with actual rate quotes and see which strategy saves you more money over your expected ownership timeline.

The right down payment strategy isn’t about following outdated rules—it’s about running the numbers for your specific situation and making a decision based on real math, not assumptions.