Alongside the 15-year term and the 25% rule, the down payment is the third pillar of Dave Ramsey's mortgage philosophy. While he suggests a minimum of 10%, he strongly encourages homebuyers to strive for a 20% down payment. Why is this number so significant? It's not an arbitrary figure; it's a strategic move that saves you money, reduces risk, and sets you up for financial success.
This article explains the critical importance of the 20% down payment and unpacks the costly trap of PMI (Private Mortgage Insurance).
The Golden Ticket: Avoiding Private Mortgage Insurance (PMI)
The single most important reason to put down 20% is to avoid PMI.
What is PMI? Private Mortgage Insurance is a type of insurance that protects your lender—not you—in case you default on your loan. Lenders typically require PMI when a homebuyer puts down less than 20% of the home's purchase price. It's an extra fee, usually rolled into your monthly mortgage payment, that provides you with zero benefit.
PMI costs can range from 0.5% to over 1.5% of the original loan amount annually. For a $300,000 loan, that could be an extra $1,500 to $4,500 per year, or $125 to $375 per month, simply thrown away.
A 20% down payment signals to the lender that you are a lower-risk borrower, eliminating the need for this costly insurance from day one.
More Than Just PMI: The Ripple Effect of a Larger Down Payment
The benefits of a substantial down payment extend far beyond avoiding PMI. It creates a positive ripple effect across your entire loan:
- Lower Monthly Payments: By borrowing less money, your principal and interest payments will be naturally lower, making it easier to stay within the 25% take-home pay rule.
- Less Total Interest Paid: A smaller loan principal means you'll pay significantly less in total interest over the life of the loan.
- Instant Equity: Starting with 20% equity gives you a substantial buffer against housing market fluctuations. If home prices dip, you're less likely to find yourself "underwater" (owing more than your home is worth).
- Better Interest Rates: Borrowers with larger down payments often appear less risky to lenders and may qualify for more favorable interest rates, saving you even more money.
What If You Can't Reach 20%?
Dave Ramsey acknowledges that saving a 20% down payment is a significant challenge, especially for first-time homebuyers. His advice is pragmatic:
- Wait and Save: The ideal path is to delay your home purchase until you have the 20% saved. This requires discipline but is the most financially sound approach.
- A Minimum of 10%: If waiting isn't feasible, he suggests a bare minimum of 10% down. With 10% down, you will have to pay PMI, but you'll be in a better position than with a very low down payment (like 3-5%).
- Plan to Eliminate PMI: If you start with less than 20%, create a plan to pay down your mortgage principal aggressively to reach 20% equity as quickly as possible, then contact your lender to have the PMI removed.
Plan Your Down Payment with Our Tools
How does a down payment affect your overall affordability? Our Ramsey Rule Calculator is designed to help you see the big picture. While the calculator focuses on what you can afford based on your income, understanding the down payment's role is crucial for planning.
You can use the results from our calculator to set a target home price, and from there, calculate the 10-20% down payment you'll need to save. This synergy between income-based affordability and savings goals is the key to a wise home purchase.
For a complete overview of how all these principles work together, visit our main guide: The Ultimate Dave Ramsey Mortgage Calculator Guide.