The monthly payment looks manageable. The lender approved you. Your real estate agent is already scheduling showings. Everything seems aligned for you to finally stop renting and start building equity—but if you’re planning to buy a house with only 5 percent down, there’s a lot the approval letter doesn’t tell you.
Except nobody mentioned that buying with 5% down isn’t just about the down payment. It’s about the cascading costs that follow you for years, the invisible constraints on your future decisions, and the psychological weight of starting your homeownership journey underwater or barely treading water.
This isn’t an argument against low down payments. Sometimes 5% down is the right move. But the version of this decision that gets sold to you—the one where you’re “building equity instead of throwing money away on rent”—leaves out the parts that actually determine whether this works out.
The PMI math is worse than the monthly number suggests
When you put down less than 20%, you pay private mortgage insurance. You knew that. What you probably didn’t know is how PMI actually behaves over time and why the monthly cost understates the real burden.
On a $400,000 home with 5% down, you’re financing $380,000. PMI typically runs between 0.5% and 1.5% of the loan amount annually, depending on your credit score and loan terms. Let’s say you’re paying 0.8%—that’s $3,040 per year, or about $253 per month.
Here’s what the payment calculator didn’t show you: you’ll pay that $253 every month until you reach 20% equity. With a 30-year mortgage at current rates, that could take 8-12 years of regular payments. At $253 monthly for even 8 years, you’re looking at over $24,000 in PMI alone.
But it gets more complicated. PMI doesn’t automatically disappear at 20% equity based on your home’s current value—it drops off at 20% of your original loan balance. If your home appreciates significantly, you can request early cancellation with an appraisal, but that costs money and requires your lender’s cooperation. Many buyers don’t realize they need to proactively request PMI removal. Under the Homeowners Protection Act of 1998, lenders must automatically terminate PMI when your loan balance reaches 78% of the original value, but you can request cancellation earlier at 80%—a distinction worth understanding before you sign. For a deeper understanding of how this protection actually works—and when it becomes a trap—read about the real cost of private mortgage insurance.
The equity illusion in year one
Here’s the number that should concern you more than PMI: on a 5% down purchase, your initial equity position is razor-thin, and it barely improves for years.
With $20,000 down on a $400,000 home, you own 5% of the asset. After a year of mortgage payments, even with appreciation, your equity position has likely improved by only a few percentage points. Meanwhile, if you needed to sell, you’d face roughly 6-8% in transaction costs—agent commissions, closing costs, repairs, staging.
Do the math: if your home hasn’t appreciated at least 3-5% in that first year, selling means writing a check at closing. You’d owe money to get out of your own house.
This isn’t a theoretical concern. It fundamentally changes your relationship with homeownership. You’re not building wealth in years one through three—you’re paying for the privilege of staying put. Any life change that requires relocation becomes financially devastating.
The emergency fund paradox
Most financial advice tells you to maintain 3-6 months of expenses in emergency savings. When you’re stretching to hit 5% down, that advice collides with reality.
Let’s say you’ve saved $25,000. You could put down 5% ($20,000) and keep $5,000 for emergencies. But now you own a house—a machine that converts small problems into expensive emergencies. The water heater that costs $1,500 to replace. The roof issue that runs $800 for temporary repair. The HVAC system that fails in August.
Homeowners with thin down payments often face an impossible choice within the first two years: deplete emergency savings for a necessary repair, or put it on a credit card at 24% interest. Neither option appears in the monthly payment calculation your lender showed you.
The people who successfully buy with 5% down usually aren’t actually putting down 5% of their total savings—they’re putting down 5% of the purchase price while keeping substantial reserves. If $20,000 represents nearly everything you have, you’re not ready to buy with 5% down. You’re ready to keep saving.
Your interest rate isn’t the same as theirs
Mortgage rates get quoted as single numbers in headlines. “Rates drop to 6.5%!” But your rate depends heavily on your down payment amount and credit profile.
Lenders price risk into loans. A buyer putting 5% down presents more risk than one putting 20% down—you have less skin in the game and are statistically more likely to default. That risk shows up as a higher interest rate, often 0.25% to 0.5% higher than advertised rates. This practice, known as risk-based pricing, is standard across the mortgage industry—Fannie Mae and Freddie Mac publish loan-level price adjustments that explicitly charge more for higher loan-to-value ratios.
On a $380,000 loan, a 0.375% rate difference means roughly $70 more per month. Over 30 years, that’s $25,000 in additional interest—separate from PMI, separate from the larger loan balance you’re already paying interest on.
Add the PMI cost, the higher interest rate, and the larger loan balance together, and the true cost of that 5% down payment isn’t $20,000 saved—it might be $50,000+ in additional costs over the life of the loan.
The refinance trap
“Buy now, refinance later” has become a mantra for low-down-payment buyers. The logic seems sound: get into the house, build equity, then refinance once you have 20% equity and can drop PMI while potentially securing a better rate.
This plan has a critical dependency: your home must appreciate, and interest rates must stay the same or fall. If rates rise after you buy, refinancing makes no sense regardless of your equity position. If home values stagnate or drop, you can’t refinance because you don’t have the equity.
The buyers who purchased with 5% down in 2021 and 2022 learned this lesson painfully. Many are now stuck with PMI they expected to refinance away, unable to access the lower rates they anticipated because their equity position didn’t improve fast enough—or because rates moved against them.
Refinancing isn’t a guaranteed exit strategy. It’s a bet on two variables you don’t control. Building your purchase decision around an assumed future refinance is building on sand.
When 5% down actually makes sense
None of this means low down payments are inherently wrong. They make sense in specific situations:
Your income is growing rapidly. If you’re a resident physician about to become an attending, or an associate about to make partner, your current income understates your ability to handle the payment. Getting into a home now, even with PMI, might beat waiting and competing in a higher price tier later.
You have substantial non-liquid assets. If you have retirement accounts, stock options, or other assets you’d rather not liquidate, putting 5% down while keeping those assets invested might optimize your total financial picture. The key is having a real backup plan, not just a theoretical one.
Your local market has a clear trajectory. In markets with genuine supply constraints and strong demand drivers, the appreciation math might outweigh the PMI cost. This requires honest analysis, not hope—look at population trends, job growth, and new construction permits, not just recent price increases.
You have genuine stability. If you’re confident you’ll stay 7+ years, have stable employment, and your total housing cost (including PMI) stays under 28% of gross income, the PMI cost becomes a manageable fee for early market entry rather than a financial burden. The 28% guideline comes from standard debt-to-income ratios used by most conventional lenders.
The common thread: 5% down works when it’s a strategic choice with backup options, not a desperate stretch to escape renting.
The question nobody asks: what’s the alternative?
The real decision isn’t “5% down versus 20% down.” It’s “5% down now versus continuing to rent while saving.”
This comparison requires honest numbers. If you’re currently paying $2,000 in rent and the house would cost $2,800 (including PMI, taxes, insurance, and maintenance reserves), you’re not “throwing away” $2,000—you’re paying $800 more for housing plus building equity. Whether that trade makes sense depends on how long you’ll stay, what you’d do with the $800 monthly difference if you kept renting, and how your local market is likely to perform.
Sometimes waiting 18 months to save an additional $30,000 genuinely costs you—prices rise, rates change, you end up paying more anyway. Other times, that wait transforms a precarious purchase into a comfortable one.
The rent-versus-buy calculation is more nuanced than most people realize, and the decision framework matters more than the calculator output. If you’re wrestling with this tension, the real cost of renting vs buying breaks down what actually matters.
The hidden cost is optionality
The deepest cost of buying with 5% down isn’t PMI or interest rates—it’s the constraint on your future choices.
With a thin equity position, you can’t easily:
- Accept a job in another city
- Downsize if your expenses need to change
- Separate from a partner without one person underwater
- Rent out the house and move (most landlord insurance requires equity)
- Access home equity for emergencies or opportunities
For 3-5 years, maybe longer, you’re committed in a way that buyers with larger down payments simply aren’t. That commitment isn’t inherently bad—but it should be conscious.
The question isn’t whether you can qualify for a mortgage with 5% down. Lenders will approve all kinds of decisions that aren’t in your best interest. The question is whether you’re prepared to trade flexibility for homeownership, fully understanding what that trade actually costs.
Because if your timeline might be shorter than you think, or your job isn’t as stable as it feels, or your relationship is newer than your mortgage term—if you’re buying with 5% down because you could make it work rather than because it genuinely makes sense—you might be building toward a decision point you don’t want to face.
And that brings you to the next question most 5% down buyers aren’t ready to answer: what happens if you need to move in 3-5 years?