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Here’s What Americans Are Putting as Down Payments for Their Homes -- and Why It’s Not Enough

Maurie Backman, The Motley Fool

On the road to buying a home, there's typically one thing that gets in an owner's way: the down payment. Though you don't have to come up with a 20% down payment to get a mortgage, doing so is a good way to keep your housing costs more manageable. That's because if you fail to put down 20%, you'll get hit with private mortgage insurance, or PMI -- a costly premium that gets tacked onto your monthly mortgage costs and might not go away for a very long time.

Even if you don't manage to come up with a 20% down payment, you'll still need some money upfront to be able to call yourself a homeowner. How much money will it actually take? It will depend on the home you buy and where you buy it.

To give you a general idea of how much Americans are putting down on their homes, home services site Porch did some digging and found that millennials make an average down payment of $17,579.42, while Gen Xers' average down payment is $17,389.38. Baby boomers, meanwhile, only put down an average down payment of $15,852.10.

House with for sale sign in front of it.

IMAGE SOURCE: GETTY IMAGES.

Here's the interesting thing, though: On a percentage basis, boomers actually put down the most money for their homes. With an average home price of $144,376.08, boomers typically put down roughly 11% of their homes' value. Gen Xers and millennials are somewhat even in this regard, with average home prices of $186,335.27 and $183,456.74, respectively, and average down payments around 9%.

But while the aforementioned numbers are respectable down payments, they don't serve the key purpose of avoiding PMI and getting a bit more instant equity in the homes they relate to. And that's a mistake that buyers might wind up regretting.

The problem with small down payments

The purpose of PMI isn't to protect buyers, but rather to protect lenders from buyers who are more at risk of falling behind on their mortgages. The problem, however, is that it can be costly. PMI can amount to up to 1% of your home loan value so that if you take out a $150,000 mortgage, you're paying an extra $1,500 a year. That might not seem like a huge amount initially, but if you're just swinging the money for your home in the first place, it could constitute a major burden.

Another issue you'll encounter when you make a small down payment percentagewise on your home is that it'll take longer to build up equity. Equity refers to the portion of your home that you actually own, which is basically the difference between its market value and your mortgage balance.

If you don't start out with much equity, and market conditions cause your home's value to plummet, you risk a scenario where you become underwater on your mortgage -- meaning you owe more on your home than it's actually worth. This isn't necessarily a problem if you're able to keep up with your mortgage payments and stay put, but it could hurt you if your circumstances change and you're forced to sell.

That's why you're better off aiming for a 20% down payment. Though you can qualify for a mortgage with less, the more money you put down, the more manageable your monthly housing costs will be, and the more options you'll have if the market changes. If you've saved up a bundle to buy a home but aren't at the 20% mark, consider cutting back on expenses for another year or two to bank the difference. Or get yourself a side job and use its proceeds to boost your down payment.

There's a reason why 20% down payments on homes have long been the convention, and it pays to make an effort to swing one and start homeownership off on the right foot.

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