How Big Should Your Down Payment Be When Buying a Home in Austin?

Buying a home in Austin comes with a big decision before you even choose a property: how much should you put down? While conventional loans allow down payments as low as 3%, some buyers aim for 20% to avoid extra costs. But is the bigger upfront investment always better? Let’s break down the pros and cons of each option—and how they play out in popular neighborhoods like Mueller, South Lamar, and East Austin.

First, What Is a Down Payment?

A down payment is the portion of the home’s price that you pay upfront. The rest is covered by your mortgage. For example, a 5% down payment on a $500,000 home equals $25,000 out of pocket.

With conventional financing, down payments as low as 3% are available, especially for first-time homebuyers with decent credit. In general, lenders want to see a credit score of 620 or higher, a stable income and employment history, and a debt-to-income ratio below 43%.

But the amount you put down doesn’t just affect your loan size. It also impacts your monthly payment, your interest rate, and whether you’ll have to pay private mortgage insurance (PMI).

A Quick Note on PMI

PMI protects the lender if you default on the loan and is required for conventional mortgages with less than 20% down. It typically ranges from 0.3% to 1.5% of your loan amount annually, depending on your credit score and loan details. That can add hundreds of dollars to your monthly payment. The good news is that PMI doesn’t last forever—you can request to remove it once you build 20% equity in your home.

Comparing Your Down Payment Options

Let’s say you’re buying a $500,000 home in Austin using a 30-year fixed-rate mortgage at 6.625% (as of May 2025). Here's how your upfront investment and monthly payment might differ:

*Estimated payment includes estimated taxes, insurance, and PMI (when applicable)

Pros and Cons by Down Payment Size

With a 3% down payment, the biggest benefit is accessibility. It allows you to become a homeowner sooner and keep more of your savings intact. This is especially useful for first-time buyers who may not have had years to save. However, this option comes with the highest monthly payments, the most expensive PMI, and stricter qualification requirements—particularly when it comes to credit scores and debt ratios. Buyers looking in up-and-coming neighborhoods like East Riverside might favor this option due to lower home prices.

At 5% down, the advantages are similar to 3%, but the slightly higher down payment may improve your interest rate and reduce your PMI. Your monthly mortgage payment will still be relatively high, and PMI is still required, but you're making modest improvements across the board. This can be a smart move for buyers aiming to live near hotspots like Barton Springs or Zilker Park, where homes are a bit pricier.

Choosing a 10% down payment gives you even more breathing room. Your monthly payment drops meaningfully, your PMI cost is lower, and you’re building equity faster. You'll also likely qualify for more favorable loan terms. The main drawback is that it takes more savings upfront, and PMI still applies—though it can usually be removed sooner. Buyers exploring established areas like Allandale or Brentwood, where home values are stable, often go this route.

Finally, with 20% down, you eliminate PMI entirely. That alone can save you hundreds each month. This option also secures the best available interest rates, results in a significantly lower loan amount, and dramatically reduces the total interest paid over the life of the loan. The tradeoff is liquidity: tying up $100,000 or more in a home may delay your purchase or reduce your financial flexibility elsewhere. But in premium neighborhoods like Tarrytown, Bouldin Creek, or Hyde Park, putting 20% down may help you win a competitive offer.

Boosting Your Down Payment With a Gift

If you're close to moving up a down payment tier, gift funds from a family member can be a game-changer. Conventional loan guidelines allow these gifts to cover some or even all of your down payment. To comply with regulations, the donor needs to sign a letter confirming the funds are a gift—not a loan—and you’ll need to document the transfer through bank statements. Common sources of gift funds include parents, grandparents, siblings, and even fiancés. Even a few thousand dollars can make the difference between 5% and 10%, which could lower your PMI and monthly payment.

What If You Invested That Cash Instead?

There’s a compelling case for keeping more cash invested—especially in today’s high-growth sectors. Let’s say you choose to put down 5% instead of 20% on a $500,000 home. That decision keeps $75,000 liquid. If you were to invest that money in a diversified portfolio with exposure to the S&P 500, AI startups, and Big Tech leaders like Apple, Microsoft, and Nvidia, your potential for long-term returns could be meaningful.

Over the past decade, the S&P 500 has delivered annualized returns above 10%, with tech stocks often outperforming. Your returns would always need to be ABOVE whatever the interest rate of the mortgage plus PMI is in order to make money.

So, let's say you only made 6% in the stock market. Over a 5 year period, you'd make over $25,000 on that many. But it’s important to keep this in perspective. If you choose the smaller down payment, your higher mortgage and PMI might cost you about $42,000 more over that same period—which means your investment would need to grow by significantly more than that to truly come out ahead. In this example, you’d still be $17,000 in the red, even with modest investment gains.

So while investing can create upside, it doesn’t always beat the guaranteed savings that come with a larger down payment—especially when mortgage rates are elevated. For buyers weighing this trade-off, the decision should come down to your risk tolerance, your liquidity needs, and your confidence in the market.

Bottom Line

There’s no one-size-fits-all answer to the down payment question. A 3% option is great for first-time buyers eager to start building equity. A 20% down payment can save you thousands over time and reduce your monthly stress. The right choice depends on your savings, risk tolerance, and long-term financial goals. If you’re shopping in neighborhoods like Crestview, Cherrywood, or South Congress, your strategy may shift depending on local pricing. And remember, your monthly savings could mean more cash for weekend brunches at Magnolia Cafe or patios at Easy Tiger.

At LendFriend, we help you compare every scenario so you can make a confident decision about what’s best for you. Whether you're buying your first home or your fifth, our team is here to run the numbers, walk you through options, and help you move forward.

If you want to discuss your loan options and learn how to buy in 2025, give us a call at 512.881.5099 or get in touch with me by completing this quick form, and I'll be in touch as soon as possible.