20% Down vs 3.5% Down: Invest the Difference?
Example: Home price: 400000 $ · Mortgage rate: 6.75 %/yr · PMI annual rate (for 3.5% path): 0.85 %/yr · Investment return on the saved down payment: 7 %/yr · Comparison horizon: 15 yrs
| Net advantage of 3.5% down + invest vs 20% down | $71,332 |
| 16.5% invested capital grows to | $188,030 |
| Total PMI cost until auto-removal | $39,645 |
| Months of PMI at 3.5% down | 145 |
| Extra interest from larger loan | $11,053 |
Worked example
On a $400,000 home: 20% down = $80,000; 3.5% down = $14,000. Investing the $66,000 difference at 7% for 15 years grows to about $182,000 — a $116,000 gain above the principal. PMI at 0.85% on a $386,000 loan costs about $22,800 before automatic removal (around 126 months). Extra interest from the larger loan over 15 years: roughly $47,000. Net advantage of the low-down + invest path: $116,000 - $22,800 - $47,000 = +$46,000. At a 7% investment return, the 3.5% path wins by a meaningful margin — but only if the $66,000 is actually invested and not spent.
Frequently asked questions
Why does the low-down path sometimes lose?
If the investment return is below 5–6%, the PMI cost plus extra interest often exceeds the investment gain from the saved down payment. Also, if the home appreciates rapidly, the 20% path (with full equity exposure) captures more appreciation per dollar invested.
What if I invest the monthly PMI savings after PMI is removed?
Once PMI is removed on the 3.5% path, the freed-up cash can continue to be invested. This tool models the initial lump-sum invested difference; adding the PMI payment into investments after removal would further favor the low-down path.
Does this analysis assume I actually invest the difference?
Yes — behavioral discipline is the key assumption. Many buyers who choose a low down payment do not invest the difference; it gets absorbed into lifestyle spending. If you are not confident you will invest and hold the difference, the 20% path offers forced savings via equity, which many people find more reliable.