This Is the Average Down Payment for First-Time Home Buyers -- and Why It Should Ideally Be Higher

Making a smaller down payment on a home could have consequences.

There's a reason first-time home buyers have struggled so much over the past couple of years. Housing inventory has been extremely low, and home prices have soared as a result. That's made it difficult for first-time buyers to come up with competitive offers.

Given how high home prices have been, it's not all that surprising to learn that in 2022, the typical first-time buyer made a 6% down payment, according to the National Association of Realtors. But a 6% down payment could open the door to ongoing homeownership costs that most buyers would probably rather avoid.

You should try to make a larger down payment

Given that home prices are way up these days, you may not be able to put down 30% or 40% of your home's value when you sign your mortgage. But you should really make every effort to put down 20%.

The reason? If you make a down payment that's lower than 20%, you'll be hit with private mortgage insurance, or PMI. And don't let the word "insurance" fool you. PMI isn't something meant to protect you, the buyer. Rather, it's meant to protect your lender in case you don't manage to keep up with your mortgage payments.

Usually, PMI is tacked onto your monthly mortgage payment as an added fee of sorts. And it can equal up to 1% of your mortgage amount. So if you're taking out a $300,000 mortgage, you may be looking at $3,000 a year in PMI. That means adding a whopping $250 per month to your housing costs.

How to avoid PMI

If you don't have enough money saved up to put a 20% down payment on a home, then you may want to hold off on buying one. Not only will a lower down payment potentially subject you to PMI, but it could also make for very expensive mortgage payments, since you're financing so much of your home purchase.

Also, a lower down payment will make it harder for you to build equity in your home. And equity is something you may want to borrow against at some point in time.

Now there are different types of mortgages that allow you to make a down payment that's less than 20% without getting stuck with PMI. These include FHA loans and VA loans. In fact, VA loans allow you to purchase a home with no down payment at all.

But while these loan products technically don't impose PMI, they come with other fees. In fact, with an FHA loan, you'll pay an upfront mortgage insurance fee and then ongoing fees. It's not exactly the same as PMI, but it's close. And while VA loans don't require you to pay an ongoing fee, they do come with an upfront funding fee that can add to your costs.

All told, you can get away with putting less than 20% down on a home. But doing so could cost you in different ways. So you may be better off waiting until you've saved enough to reach that threshold before making an offer.