What is a standard down payment?

"Standard down payment" is somewhat of a misnomer, since there are now laws or regulations dictating a minimum down payment for mortgage loans from banks, credit unions and other lending institutions. But for the past few decades, homebuyers have been encouraged to put down at least 20 percent towards their home mortgage. This is because the vast majority of mortgage lenders require homebuyers to purchase private mortgage insurance (PMI) if the debt-to-value ratio on a home purchase exceeds 80 percent. Private mortgage insurance is usually calculated as a portion of the outstanding principal and is added to your monthly mortgage payment. Private mortgage insurance protects the lender in the case that you default. You'll have to continue paying private mortgage insurance until you build up a certain amount of equity in your home. Usually, that's 20 percent - but sometimes, you may have to continue paying PMI until you have 25 percent or more equity.

Also, in general, the lower the down payment you make, the riskier your home mortgage loan is considered. This is partially because the amount of your loan is higher, but also because lenders like when borrowers demonstrate that they can effectively save up their money.

If you are pursuing a government backed loan that's sponsored through an FHA program, you may also have to meet certain down payment requirements. But again, you can often purchase mortgage insurance if you do not meet the minimum down payment guidelines.

With all that being said, it is possible to get a home mortgage loan with a 10 percent down payment, or even no down payment at all. But you will almost always pay more in the long run. No down payment loans will usually have the closing costs rolled into the principal, which means you begin your loan "upside down." Lenders will also charge higher interest rates for larger loans as well, so the added expenses grow exponentially.

There are some advantages to paying less upfront for your home purchase. For example, if you anticipate that you'll have a higher income down the road or hope to refinance in the next few years, the higher interest rates may be justified. Paying less upfront allows you to afford more home, and frees up your cash for other expenditures. For example, if you plan on making substantial improvements on your home before you move in, you could increase the value of the home such that you can avoid private mortgage insurance after the first few months.

To help you decide, it's a good idea to run the numbers through a mortgage calculator to see which size down payment works best for your long term goals.