Putting 20% Down Feels Safe. Sometimes It Isn't.

Every first-time buyer I sit down with eventually says some version of the same thing: "We want to wait until we have 20% saved so we can avoid PMI." I get it. That advice has been passed down for decades. But in Austin's market, where a median home in Cedar Park or Round Rock sits north of $400,000, waiting to hit 20% can cost you far more than the PMI you were trying to dodge.

Let me show you the actual math.

The PMI Boogeyman Is Overblown

Private mortgage insurance on a conventional loan is not permanent and it is not free money to the wind. On a $420,000 home with 5% down (a $399,000 loan), PMI typically runs somewhere between 0.5% and 1% of the loan balance per year, depending on your credit score. At 0.7%, that's about $233 a month to start.

That number sounds painful until you compare it to what you gave up to avoid it.

The real question isn't "how do I avoid PMI?" It's "what is my money worth if I keep it instead of locking it into equity?"

If you're pulling an extra $65,000 out of savings or investments to get from 5% to 20% down on that same home, you need to ask what that $65,000 would have done sitting in a brokerage account or even a high-yield savings account. At a 5% annual return, that's $3,250 a year, or $271 a month. You just covered the PMI payment and kept your liquidity.

The Opportunity Cost Calculation Most Buyers Skip

Here's a scenario I walked through recently with a buyer couple relocating to Lakeway from out of state. They had $130,000 in savings and were looking at a $480,000 home.

Option A: Put 20% down ($96,000), wipe out most of their reserves, no PMI. Option B: Put 5% down ($24,000), keep $106,000 in reserves, pay PMI.

With Option A, they had about $34,000 left after closing costs. One HVAC issue, one job hiccup, and they're financially stressed in a new city.

With Option B, they had real breathing room. The PMI on their conventional loan was $218 a month. The $72,000 difference in deployed cash, invested conservatively, more than offset that cost and gave them the kind of financial cushion that lets people actually enjoy homeownership.

We went with Option B.

When 5% Down Makes the Most Sense

This strategy isn't right for everyone. Here's when it tends to work well:

  1. Your credit score is 680 or above, which keeps your conventional PMI rate competitive.
  2. You have meaningful savings or investments you'd be draining to hit 20%.
  3. You plan to stay in the home at least five years, giving you time to build equity to the point where you can request PMI cancellation (at 80% LTV on conventional loans, you can ask the servicer to drop it).
  4. You're buying in a neighborhood with stable or appreciating values, think Travis or Williamson County rather than more speculative pockets.
  5. Rates are such that the monthly payment is manageable without stretching your budget.

PMI Cancellation: The Exit Ramp People Forget

Here's something a lot of buyers don't know. Under the Homeowners Protection Act, your lender is required to automatically cancel PMI when your loan balance reaches 78% of the original purchase price, based on your scheduled payments. But you can request cancellation at 80% LTV if you can document the value hasn't declined. In a market like Westlake or the Brushy Creek corridor in Cedar Park, appreciation can get you there faster than your payment schedule alone.

That means the PMI window is often shorter than it looks on paper.

The Programs Worth Knowing About

If you're going low down payment, the loan type matters.

  • Conventional with 5% down works well for buyers above 680 credit. PMI drops off. Loan limits in Travis County allow conforming loan amounts up to $806,500 in 2026.
  • FHA with 3.5% down is worth considering if your score is between 580 and 679, but FHA mortgage insurance now stays for the life of the loan if you put less than 10% down. That changes the calculus significantly.
  • Conventional 3% down programs (like Freddie Mac's Home Possible or Fannie Mae's HomeReady) exist for buyers who meet income limits, worth asking about if you're a household earner under the area median income threshold.

One More Thing: Seller Concessions Change the Math Too

In today's Austin market, we are seeing sellers in the $350,000 to $550,000 range offer concessions, sometimes 2% to 3%, to help buyers with closing costs. A buyer who comes in with 5% down and negotiates a seller concession to cover closing costs is often in a better position than one who drained their savings for 20% and has nothing left to negotiate with.

Cash reserves are a negotiating tool. Don't spend them before you need them.

Want to walk through your numbers? Talk to Austen.

Austen Smith, NMLS #265697. Barton Creek Lending Group, NMLS #264320. This post is for educational purposes only and does not constitute a loan commitment or guarantee of terms.