Here is the introductory post in our new study series — Down payment download — detailing the benefits available to mortgage-funded buyers when acquiring home ownership using a 20% cash down payment. This series showcases the mortgage fundamentals every DRE licensee in sales needs to understand and be able to communicate when building their practice.
Why this matters: Real estate agents and brokers trained in the math of mortgage-funded home purchases are, as a fiduciary, personally qualified and duty bound to give their buyer-clients critical financial advice. First-time homebuyers experience savings upfront and every month during ownership as well as long-term financial security provided by a 20% down payment. Importantly, the first-time homebuyer avoids youthful appeals built into commercialized housing policies pandering with low down payments and readily available financing.
Turning tenants into buyers at no increase in cost
Most first timers, typically tenants, are keenly aware long-term wealth is built by monthly “savings” inherent in today’s mortgage principal reduction which accrues for property owners.
However, first-time homebuyers are intimidated by:
- a stifling rise in their debt obligations brought on by a mortgage,
- their uncertain feelings about a commitment to upfront and long-term mortgage costs, and
- restraints of their seemingly stagnant wages.
However, these buyers have a financial blind spot. They are grossly undereducated, if at all, about managing capital, the money from different sources fueling their acquisition of a home.
Agents and brokers need in on this discussion as today’s clients tend to rely heavily on advisors. Further, agents are the sole gatekeepers representing buyers in real estate transactions and owe a duty to their client-buyers to advise them on the material facts of acquiring ownership
It is critical buyers get information needed to make educated financial choices. Acquiring real estate ownership, leveraged by mortgage debt, is filled with decision making. However, a buyer’s financial decisions are informed by the advice of their agent about mortgage debt. No one else owes any duty to advise the buyer on financing an acquisition, and other contacts are providers with profit objectives adverse to homebuyers.
Mortgaged homeownership is only compatible for a buyer when, in the future, they are likely able to meet the obligation of mortgage payments and the other costs typically experienced by homeowners.
Savings transform into equity
Since the goal of mortgaged ownership is to start building up equity in real estate through monthly payments, a first-time buyer needs a monthly savings program to set aside a 20% down payment to acquire a property. A 20% down payment is a financial requisite to ownership an agent discusses with a tenant while bonding as their buyer agent for a future home purchase.
This series is about an agent or broker fully and effectively communicating the costs of mortgage-leveraged ownership. For a tenant to know the consequences of taking on mortgage debt, the discussion begins with understanding how a landlord, with or without a mortgage, covers all costs of ownership from the rent amount the tenant pays.
Thus, a first-time homebuyer is taught a fundamental truth about rent and ownership. The dollar amount of a property’s market rent is the ceiling for a homebuyer to spend on mortgage payments and all other costs of ownership in a purchase of that property.
For an agent giving financial advice, their intervention stops a tenant’s cycle of paying 1/3rd of their income for rent and receiving in exchange only the right to occupy property. In the ownership of a mortgaged home, 1/3rd of the owner’s income conveys the benefits of occupying a home “rent free” and building equity in that home.
The additional savings through equity buildup is achieved when spending no more than the amount of rent the chosen home commands in the local rental market.
A successful move from renting to owning property involves timing the purchase of property during the business cycle for advantageous pricing. In boom times, the costs of ownership easily reach 130% to 150% of a property’s rental value.
Thus, even 20% down in boom times does not meet the test of financial preparedness for ownership. The timing of a home purchase is best during a recession and in the initial stage of a recovery before boom-time pricing sets in.
Breaking down the cost barrier
An agent with a handle on mortgage debt arrangements, opportunity costs and ownership operating costs is able to advise and set their buyer-client’s expectations for ownership. Only with an agent’s advice is a first-time buyer sufficiently informed to consider a property available for sale.
With this approach, an agent qualifies a potential buyer-client before locating property to determine their financial ability to own for the long term. Again, advice is part of the consumer protection an agent owes to a buyer-client so the buyer is more likely to win than lose. With their savings, they are placing a bet on the future – with the help of their agent.
When purchase terms include mortgage financing, whether the down payment is more or less than 20% of the price, the buyer of a property must consider:
- interest charges around 6.5% in Q3 2025 on the amount borrowed, amortized over a 30-year period [see current market rates];
- savings used to fund the down payment incur the loss of future interest on the savings invested in ownership, an opportunity cost of lost interest which is offset by a pro rata share of the “implicit rent” attributed to the down payment;
- cash reserves set aside as absolutely necessary for payment of property taxes, insurance premiums, any HOA or improvement district payments, and maintenance of the improvements;
- emergency funds saved to cover six months of mortgage payments for unforeseen changes or loss; and
- mortgage insurance premiums when the down payment is less than 20% to cover the MLO’s risk of loss, provided by either:
- the Federal Housing Administration (FHA), with government mortgage insurance premiums (MIP); or
- private insurers, with private mortgage insurance (PMI).
Only a property paid for in cash avoids mortgage considerations and consequences. All owners incur operating costs of ownership which for landlords are covered by rent payments from tenants or, for owner occupants, by “receipt of implicit rent.”
Related article:
Different down payment options
Nationwide, 52% of mortgaged homebuyers put down more than 20% in 2024. The remaining half of the borrowers, reported by Zillow, included:
- 28% putting down 20%;
- 22% putting down 10%-19%;
- 8% putting down 6%-9%;
- 11% putting down 3%-5%; and
- 7% putting down less than 3%.
Real estate brokers and agents need information to address client questions about mortgage rates, default insurance premiums, down payment assistance programs, personal gifts and household finances. Especially when a buyer’s current financial acumen – shaped only by an agent’s advice, never by an adverse provider such as the MLO or third-party financial advisor – pays off in the future.
The benefits of incurring opportunity costs
It takes a few years to build up the savings to go from the 3.5% down payment needed for the maximum loan-to-value (LTV) mortgage amount to a 20% down payment on the same property. To save for a down payment, a first timer must establish a monthly regimen and have the patience to maintain it.
A personal savings effort avoids a risk-of-loss in the future which is a first timer’s long-term financial goal.
The use of savings for a down payment presents a dilemma about alternatives, called opportunity costs. The opportunity costs of investing savings in a home are the missed potential alternatives when using the savings in a venture rather than earning interest. Putting cash into a down payment costs a buyer around 3% interest annually from a savings account or investment elsewhere.
The amount saved when using savings to reduce the amount of principal borrowed, is the amount of mortgage interest avoided at, say, 7%. And the interest no longer received on the savings, say, 3%, is included in the mortgage interest avoided at 7%. Thus, an additional 4% is earned on the down payment by using the savings to buy the home – getting 7%, not 3% on the savings. The goal is to use cash to reduce mortgage principal, the savings being received through reduced mortgage payments over the life of the mortgage.
Note: Future installments of the series Down payment download will cover the math behind the earning power of money in the context of real estate.
How 20% helps your buyer’s financials
As prospective clients, first-timers are tantalized by the appeal of purchasing a home with little to nothing as a cash down payment – the instant satisfaction of a pivot into expensive housing conditions compared to rent for the same or comparable property.
The risks a first-time buyer takes on with a decision to pay less than 20% down does unacceptable long-term damage to a huge percentage of new homeowners who become overwhelmed in every business cycle. A buyer’s decision to max out mortgage debt leveraging is usually due to ignorance from a lack of buyer agent’s advice.
Putting forward a larger down payment rewards the buyer at every point in the quest to purchase a home:
- an agent or broker, for a buyer or seller, looks for a buyer who is most likely to close a purchase of property;
- a seller and seller agent consider accepting a lower than asking price offer; and
- an MLO takes into account the loan-to-value ratio (LTV) when approving an application to originate a mortgage.
The seller broker looks at 20% down as an indication of a more certain payday than competing offers with less down payment, especially in a recessionary market favorable to buyers. A buyer providing a 20% down payment is treated as solvent, qualified and more likely to close.
The seller agent knows a significant down payment limits requests for seller contributions to pay a buyer’s costs as an offset for accepting a lower than asking price for a home. While a large down payment helps a homebuyer acquire the property they want, responsible financial decisions tailored to their situation offer the best assurance they will retain that ownership during foreseeable financial difficulties.
Holders of residential mortgages with loan-to-value ratios (LTVs) exceeding 80% cover the increased risk of loss on a default with mortgage insurance paid for by the homebuyer through:
- mortgage insurance premiums (MIP) with the Federal Housing Administration (FHA); or
- private mortgage insurance (PMI) with private insurers.
The mortgage insurance premium (MIP) tacks onto mortgage payments about 1/10 more interest annually for mortgage funds when the down payment is less than 20% of the purchase price. This premium amount is eliminated by using savings to make the 20% down payment. The avoided MIP cost totals far more than the loss of interest on the savings used to meet the 20% threshold.
Related chart:
The cost of ownership
The down payment, together with mortgage funds, represents the capital investment a buyer-occupant makes to own and occupy property. The buyer occupant’s return on capital is called implicit rent. The implicit rent is the amount a homebuyer would have paid as a tenant to rent the same or equivalent property.
For all acquisitions of property, the buyer agent and their buyer-client review how implicit rent plus equity balances against:
- current mortgage interest rates;
- opportunity costs of lost interest on savings;
- default insurance premium rate; and
- operation and maintenance costs of the property.
Property prices do fluctuate dramatically over the period of an entire business cycle, from recession through a recovery. In this context, savings are an important cushion against foreclosure or a few years experiencing negative equity when property values drop more than the amount of the down payment.
Home equity protects against these cyclical ups and downs in the economy while liquid assets like cash reserves are an emergency fund.
Editor’s note – The next article in the Down payment download series examines buyer sourcing of a 20% down payment.
Related chart:
A lifetime of saving is the new first-time homebuyer reality
