20% Down or Keep the Cash: The Calculation Most Buyers Skip

The Real Question Behind the Down Payment Decision

The 20% threshold exists for one specific reason: it eliminates private mortgage insurance. That's the whole logic. It was never a universal prescription for wealth-building.

The actual question is more precise. You hold a pool of liquid capital. You can deploy it into home equity at a return equal to your mortgage rate, or you can invest it elsewhere at a different return. The higher return wins. Every time.

Buyers who default to 20% without running this comparison are making a capital allocation decision by habit, not analysis.

What PMI Actually Costs

PMI rates typically fall between 0.5% and 1.0% of the loan balance annually. On a $480,000 loan, that's $2,400 to $4,800 per year, or $200 to $400 per month.

That cost is not permanent. Federal law requires lenders to cancel PMI automatically when your loan-to-value ratio reaches 78%. On a standard 30-year fixed mortgage, that happens around year seven to nine, depending on your amortization schedule and any additional principal payments.

Here's the number most buyers miss. The total PMI exposure on a $480,000 loan at 0.7% annually, over eight years, is approximately $26,880. That's the real cost you're paying to keep cash invested rather than tied up in equity.

Whether that $26,880 is worth paying depends entirely on what your invested cash produces during those eight years.

The Opportunity Cost Framework

Set up the comparison as a two-column ledger.

Column A: Cost of keeping cash invested (the smaller down payment path)

• Annual PMI premium
• Additional interest on the higher loan balance

Column B: Cost of putting 20% down (the larger down payment path)

• Forgone investment returns on the cash deployed into equity
• Reduced liquidity and its associated risk premium

The decision point: if Column B exceeds Column A over your expected holding period, the smaller down payment is the analytically correct choice.

The Hurdle Rate Calculation

Your mortgage rate is the baseline. That's the guaranteed, risk-free return you earn by paying down debt instead of investing.

If your 30-year fixed rate is 6.85%, you need to believe your investable cash will return more than 6.85% annually, net of taxes, to justify keeping it out of the property.

For taxable accounts, adjust the mortgage rate downward if you itemize deductions. A 6.85% mortgage rate becomes approximately 5.14% after deduction for someone in the 25% marginal bracket. That's a lower hurdle to clear.

For tax-advantaged accounts, such as a 401(k) or IRA, the comparison shifts more decisively toward investing. Tax-sheltered compounding at 7% to 8% annually beats a 5.14% after-tax mortgage cost by a meaningful margin over a decade.

Worked Example 1: The High-Rate Environment

Home price: $650,000 Buyer has $200,000 in liquid assets available for the down payment.

Scenario A: 20% down Down payment: $130,000 Loan balance: $520,000 Monthly principal and interest at 6.85%: $3,414 No PMI. Remaining investable cash after closing costs: approximately $55,000.

Scenario B: 10% down Down payment: $65,000 Loan balance: $585,000 Monthly principal and interest at 6.85%: $3,843 PMI at 0.75% annually: $365/month Additional monthly cost vs. Scenario A: $794 Remaining investable cash: approximately $120,000.

Now run the opportunity cost comparison over eight years, which is approximately when PMI drops off on this schedule.

The buyer in Scenario B pays roughly $76,224 in additional interest and PMI over eight years ($794 x 96 months, rounded for amortization shifts).

The buyer in Scenario B also keeps $65,000 more invested. At a 7% annual return, that $65,000 compounds to approximately $111,600 over eight years. The gain above principal is $46,600.

At 7% return: Scenario B costs $76,224 more in carrying costs but produces only $46,600 in additional investment gains. Scenario A wins by approximately $29,600.

At 10% return: The $65,000 grows to approximately $139,400. The gain is $74,400. Scenario B wins by approximately $1,800.

In a 6.85% rate environment, the hurdle is high. The smaller down payment only wins if your investments consistently return 9.5% or better, after tax. That's achievable in equities over long periods, but it carries real sequence-of-returns risk.

Conclusion for this scenario: At today's elevated rates, 20% down is defensible for buyers without high-conviction investment allocations.

Worked Example 2: The Low-Rate Environment

Home price: $550,000 Mortgage rate: 3.25% (refinanced or purchased in 2020-2021) Buyer considers pulling equity via refinance or evaluating their original down payment decision in hindsight.

Scenario A: 20% down at purchase Down payment: $110,000 deployed into equity. After-tax mortgage rate (28% bracket): approximately 2.34%.

Scenario B: 10% down at purchase Additional $55,000 kept invested. PMI at 0.65%: approximately $2,948 per year for seven years. Total PMI cost: $20,636.

The $55,000 invested in a diversified equity portfolio from 2020 to 2027, at an average annual return of 9.5%, grows to approximately $103,800. The gain above principal is $48,800.

Cost of the strategy: $20,636 in PMI. Net gain from keeping cash invested: approximately $28,164.

At a 3.25% mortgage rate, keeping more cash invested and accepting PMI was the correct decision. The math is not ambiguous.

Conclusion for this scenario: When mortgage rates fall below 4%, the opportunity cost argument for a smaller down payment becomes very strong, particularly for buyers with equity-heavy investment portfolios.

Three Factors That Shift the Decision

1. Your actual investment behavior

The opportunity cost argument requires you to actually invest the retained cash. Buyers who hold excess cash in a savings account at 4.5% APY change the calculation. At 4.5% gross, and closer to 3.2% after tax, a 6.85% mortgage rate still beats it. Keep the larger down payment.

2. Your liquidity needs

Home equity is illiquid. A $130,000 down payment is capital you cannot access quickly without a cash-out refinance or sale. Buyers within five years of a major liquidity event, such as a business sale, divorce settlement, or retirement drawdown, should apply a liquidity premium to the equity allocation. That premium favors the smaller down payment.

3. Your loan type and PMI terms

Lender-paid PMI (LPMI) bundles the insurance cost into a slightly higher interest rate. This changes the cancellation math entirely. LPMI never cancels automatically. Model this separately if your lender quotes it.

FHA loans carry mortgage insurance for the full loan term if your down payment is below 10%. That changes the total cost substantially and usually makes 10% down preferable to 3.5% on FHA.

When 20% Down Is Clearly Correct

Put 20% down if any of the following apply.

Your mortgage rate exceeds 7% and you have no tax-advantaged contribution room remaining. The hurdle is simply too high for taxable investment accounts to clear reliably.

Your investment track record shows consistent underperformance relative to index benchmarks. The opportunity cost argument depends on you executing the investment plan.

You are within three years of retirement and prioritizing debt elimination. The behavioral and psychological value of a paid-down mortgage has real utility that a spreadsheet won't capture.

Your cash reserves after closing would fall below six months of expenses. Buying a house while illiquid is its own financial risk. No down payment optimization offsets a forced sale.

Run Your Own Numbers

The worked examples above use specific rates, returns, and loan balances. Your situation will differ. The rate environment will shift. Your marginal tax rate and investment allocation change the hurdle rate.

The CalcMoney mortgage calculator lets you model both scenarios side by side. Input your purchase price, loan options, estimated PMI rate, and expected investment return. The output shows the cumulative cost of each path over your chosen holding period.

Run your down payment comparison now →

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The decision is not about convention. It's about which allocation of your capital produces the better net outcome over the period you actually plan to hold the property. Run the numbers before you wire the funds.