Twenty percent is an important number for homebuyers. It’s the amount of a standard initial amount to put down on a home, and as Zillow reported Friday, it’s also the percentage of buyers who say saving for that payment is their biggest concern.
According to Zillow, the median U.S. home price is $192,500, which means that a 20 percent down payment would be $38,500. That’s two-thirds the average annual income, even before closing costs.
That’s also just the average. In some large markets, particularly in coastal California cities, buyers who make median salaries for those markets must save nearly 200 percent of their annual salaries just to make that one-fifth down payment. In San Jose, for example, the median income is $105,455, but the median home price is $961,600. A 20 percent down payment would be about $192,000, or 182 percent of a median income.
On the other side of the spectrum, buyers in Pittsburgh, Indianapolis, and Kansas City would need to put away less than half their salaries for a down payment on a median priced home.
The dynamic is especially important to first-time buyers who make up half of all home purchases, but face increasing troubles landing deals because, among other reasons, they bring no equity to the sales table. Trulia reported earlier this week that first-timers were more susceptible to having deals fall through after they are started than repeat buyers because of unfamiliarity with the process, lack of equity, and sheer affordability—first-time buyer households typically will need to spend nearly 39 percent of their monthly income to purchase a home, according to Trulia.
Zillow’s chief marketing officer, Jeremy Wacksman, said that the 20 percent down payment plateau is an important one when factoring in the long-term purchase of a home. While it is possible to put down as little as 3.5 percent on a home, the trade-off is a higher interest rate and costly private mortgage insurance.
According to Zillow, a better interest rate can mean thousands of dollars saved over time. On a $200,000 loan, for example, lowering the interest rate by half a percentage point would save the borrower $20,000 over the lifetime of the loan.