Time is a commodity, the old saying goes, and that goes double for Americans looking to save up for a down payment on a new home.

Unfortunately, that process seems to be taking longer and longer.

According to a study by U.S. Mortgage Insurersit takes 20 years for a middle class U.S. family to save for a mortgage. 

The good news, according to USMI which does have some skin in the mortgage down payment game is that it takes just seven years to save for a home down payment when the loan is backed by private mortgage insurance (PMI).

“No, you don’t need a 20% down payment to gain mortgage approval,” said Lindsey Johnson, president of USMI.

According to Johnson, it would likely take 20 years for Americans at the national median income of $61,372 to save 20% (plus closing costs) for a $262,250 single-family home, which the USMI cites as the national median sales price. 

“However, that wait time drops to seven years if the household purchases a home with a 5% home down payment, where the loan is sustainably backed by private mortgage insurance,” the study notes. “This represents a 65% decrease in wait time at the national level, with the same percentage decrease at the state level.”

Where you buy impacts down payment timetables

Other recent studies say the down payment savings timetable may be shorter or longer depending on where the potential homeowner wants to buy a home.

According to Unison, a San Francisco-based home investment firm, it only takes 14 years to save for a 20% home down payment, but that figure comes with a big caveat.

If the homeowner is targeting a property in the nation’s eight least affordable cities, the down payment savings timetable could take 30 years or longer. That list includes the following U.S. cities:

  • Boston (30 years)
  • San Jose and San Diego (31)
  • Miami and Manhattan (36)
  • Honolulu and San Francisco (40)
  • Los Angeles (which tops the Unison list) at 43 years
San Francisco, PMISan Francisco, PMI
Unsplash/Chris Lawton

That long a wait is significant, the Unison report states, as it means that millions of Millennial-age homebuyers won’t achieve the American dream and buy a home until they’re in their 40’s which is way longer than previous generations.

“The way things are going, an entire generation of Americans may be approaching retirement before they can securely own a home or be forced to take on more risk than they can reasonably afford in order to realize their dream of homeownership,” says Thomas Sponholtz,” chief executive officer at Unison. 

“This is a societal and economic problem that impacts all income levels and can only be addressed through massive infrastructure investments and rapid adoption of smarter and safer non-debt-based finance and homeownership solutions,” he says.

Is 20% an “antiquated” figure?

There is good news for cash-starved potential homeowners, who don’t necessarily want to rely on private mortgage insurance to get a qualified home mortgage down payment.

“Saving 20% for a house down payment is an antiquated tradition that isn’t true in this day and age,” says Ryan Richardson, a branch manager with Movement Mortgage in Phoenixville, Pa.There are some programs, especially with the U.S. Department of Agriculture and the U.S. Veterans Administration, and some state bond programs (that are state specific) that allow 100% home mortgage financing.”

There are also down payment assistance and grant programs, which aid newbie homeowners in covering the cost of their down payment. “For example, the U.S. Federal Housing Administration (FHA) allows you to buy a house with as little as 3.5% down, and there is a Fannie Mae Conventional program called HomeReady that only requires 3% down as long as you qualify,” Richardson says.

Trying, often in vain, to get to that magic 20% down figure could actually be a waste of time, Richardson adds.

“The best home down payment number is the one that fits your budget,” he says. “You have to remember that once you own the house, you are the landlord. If the water heater breaks, you have to fix that. If the HVAC system goes out, you have to fix that, too.”

“If you have 20% to put down, great, but if that is going to wipe out your entire savings, that might not be the best option for you,” he adds.

Richardson says he typically recommends his clients to retain some reserves of cash for emergencies for the house or repairs. “For example, it might make sense to put down 17% and save the extra 3% for emergencies,” he notes.

PMI overrated?

Private mortgage insurance may not be the best answer, either.

“PMI’s role is to protect the lender, it honestly does nothing for the borrower,” Richardson says. “The borrower basically is paying an insurance policy to protect the lender in case they default, the lender isn’t out the whole loan.”

Others agree, noting that private mortgage insurance is a protection for the lender, even though it is common in cases where the down payment is less than 20%. 

“Through monthly premiums or upfront insurance fees, PMIs protect the mortgage lender in the event you default on your loan,” says Luke Babich, CSO and real estate specialist at Clever, a St. Louis-based company that pairs home-buyers and sellers with real estate agents. 

According to Babich, PMI premiums vary from .5% to 2.3% of the loan amount annually, which can add up to significant amounts over the years. “However, once your loan balance reaches 80% of the home value or lower, you can write to your mortgage lender about canceling the PMI,” he says.

That said, PMI is not the “worst thing” that should be avoided at all costs. 

“It is still tax deductible on a primary residence and often cases, depending on your credit score and other factors, could be fairly cheap,” Richardson says.

Lower interest rates factor in, too

Other mortgage industry insiders say the terrain has shifted in favor of lower home down payments since home loan interest rates have fallen so low in recent years.

“The old adage of saving 20% comes from the days when interests were in the 
double digits,” says Rob Wittman, a real estate broker at Dutko Ragen Homes & Investments, Keller Williams, in Falls Church, Va.

A few decades ago, the penalty for borrowing money for a new home was 18% and that was a good incentive to put a higher down payment. 

“But now interest rates are below 4% and the historical return on your money is 8%,” Wittman says. “That leaves a 4% opportunity that a borrower can make while building equity in their home.”

Plus, if you want to contribute to build your equity faster, do so. “Nearly all loans allow for prepayments of principal with no penalty,” Wittman adds.

The best path forward: Talk to a pro

So what’s the best amount for a down payment? Turns out, it’s not a one size fits all solution.

PMI, property mortgage insurance
PMI, property mortgage insurance

“Sure, you can follow the general 20% rule, which could save you thousands in PMI and interest payments over the lifetime of the mortgage,” says Babich. “However, this all depends on individual finances.”

“In that regard, it may be best to consult a financial adviser before signing any mortgage agreements,” he advises.