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Whether to make a larger down payment on a home or invest the money in the market instead is one of the perennial questions people face when purchasing real estate. Some experts advise putting more into the down payment to keep your monthly expenses down and potentially secure a lower interest rate, while others suggest you’d be better off over the long run investing a chunk of that capital at rates of return higher than your mortgage interest payments.
Which option is best for you? According to Harrison Kennard, a Michigan-based chartered financial planner, the answer depends on your personal circumstances, risk tolerance, and the broader market trajectory. We dig into the numbers below.
Key Takeaways
- The main benefits of a 20% down payment include avoiding the private mortgage insurance (PMI) typically required for down payments less than that, reducing monthly payments, and potentially securing a better interest rate.
- However, the rates of return on the stock market and other investments have generally been higher than interest rates.
- Generally speaking, high interest rates favor larger down payments and vice versa.
PMI and Opportunity Costs
Despite what many people think, a 20% down payment isn’t necessary to buy a house. That figure comes from the fact that your monthly payments will be more manageable since that’s typically the amount above which you can avoid paying PMI. Putting more down can also help you secure a better interest rate.
A popular alternative is to invest a chunk of that money. If you’re a confident investor, you might believe you can generate a higher return from stocks or other assets than the interest rate on a home loan plus PMI.
“While PMI might cost 0.5% to 1.5% annually, historical returns from the S&P 500 have ranged between 7% and 10%,” Kennard said. “That opportunity cost—the potential returns you miss by putting more money into your home—could outweigh the benefits of avoiding PMI.”
Running the Numbers
Prince Dykes, a financial advisor and the founder of Royal Financial Investment Group, offered an example of two buyers purchasing a $370,000 home on a 30-year fixed mortgage with a 6.75% interest rate. Buyer A put 20% down, while Buyer B’s initial down payment was 3%.
Here’s the breakdown:
| Person A | Person B | |
| Down payment | $74,000 | $11,100 |
| Loan amount | $296,000 | $358,900 |
| Monthly principal & interest | $1,935 | $2,330 |
| Estimated monthly PMI (1% annually of loan) | $0 | $299 |
In the above example, Person A ends up paying $694 less a month. If you look ahead 12 years, the average duration of home ownership in the U.S., the savings on that front is $99,936.
Would Person B fare better? That depends on how they invested and what Person A did with their savings.
If Person B had invested the $62,900 they didn’t spend on a down payment in the S&P 500 at a 7% average annual inflation-adjusted return, they’d have emerged 12 years later with about $142,000. However, that doesn’t make Person B the winner. By that point, Person A would have much more equity in the home. Additionally, if they’d taken the extra money from not paying the PMI and invested it at the same rate as Person B, they’d have more savings as well.
The chart below shows the difference in home equity and overall wealth for persons A and B:
Which Is the Best Option?
Kennard said he generally suggests that his clients focus on making a larger down payment, but noted that there are occasions when investing that capital could be smarter.
“Ultimately, the decision should reflect both your personal financial situation like goals or risk tolerance and research into the broader market trajectory,” he said. “If conditions favor borrowers—low rates, strong markets, and inflation—and you have limited savings, a smaller down payment with an educated investment strategy makes sense. But in most cases, the safety of a larger down payment would be the smarter choice.”
The Bottom Line
The decision between a 20% down payment and investing the difference comes down to three key factors: your risk tolerance, current interest rates versus expected investment returns, and your overall financial stability.
When mortgage rates are high (like today’s near 7% average fixed-rate environment), larger down payments typically make more sense. If you have limited emergency savings or prefer guaranteed savings over market uncertainty, the security and immediate cash flow benefits of putting 20% down usually outweigh the potential gains from investing. For most homebuyers, especially first-time buyers, a larger down payment is often the safer choice.
