Make New York Post a Preferred Source New York Post Composite A zero-down payment might sound like a product designed for someone who hasn’t saved enough to buy a home. But having cash in the bank does not necessarily mean you should hand it over as a down payment.
The reason is that cash and home equity do two different jobs. One is your liquidity buffer and the other is the accumulating value of your most valuable asset. Money in a savings account can cover a broken furnace, a job loss or another expense tomorrow. Money used for a down payment increases your home equity, but getting that money out is often a process and can be expensive, as you either have to sell your home or borrow against its value.
This is important for buyers who have accumulated savings but qualify for a zero-down mortgage, such as a VA or USDA loan. As a rule of thumb, the CFPB recommends subtracting money you may need for other priorities, including moving costs, possible renovations, furniture and an emergency fund before deciding how much cash is actually available for a down payment.
If at all possible, you want to avoid being house rich and cash poor. Chris Birk, Vice President of Mortgage Insight at Veterans United Home Loans told the Post, “There’s no one-size-fits-all answer here, and I wouldn’t encourage anyone to spend thousands of dollars buying down their interest rate without first making sure the math works in their favor.”
The typical closing costs for a zero-down mortgage run from 2% to 5% of the purchase price, excluding the down payment. On a $400,000 home, that would equal roughly $8,000 to $20,000, although the actual bill depends on the lender, loan type, property and location.
A larger down payment lowers the loan-to-value ratio, or LTV, which compares the amount borrowed with the value of the property. Lenders often use LTV to set interest rates and determine whether mortgage insurance is required. A lower LTV generally gets you a better rate, and borrowers with higher LTV ratios can face higher borrowing costs.
Putting less than 20% down on a conventional mortgage also usually means paying private mortgage insurance (PMI). PMI protects the lender in the case of a borrower default (not the homeowner) and adds to the cost of the mortgage. Some low-down-payment conventional loans avoid separate PMI by charging a higher interest rate instead.
VA-backed purchase loans can allow qualified borrowers to buy without a down payment and do not require PMI or FHA-style mortgage insurance premiums. However, many VA borrowers pay a funding fee.
For a first use of a VA purchase loan, the current funding fee is 2.15% with less than 5% down. It drops to 1.5% with at least 5% down and 1.25% with at least 10% down. Some borrowers are exempt from the funding fee, so the calculation depends on the individual borrower.For borrowers who have used the benefit previously, the incentive to put money down is even steeper. “The savings can be even more significant for repeat VA buyers,” Birk explains. “With no down payment, the funding fee for subsequent use is 3.3%. But putting 5% down brings that all the way down to 1.5%, and 10% down lowers it to 1.25%.”
That means a veteran with substantial savings should not assume either that zero down is always preferable or that making a down payment is automatically better. The relevant question is how much cash must be surrendered to cross a funding-fee threshold, how much the lower loan balance reduces interest costs and how valuable it is to keep that cash accessible.
USDA borrowers face a similar tradeoff. The USDA Single Family Housing Guaranteed Loan Program offers eligible borrowers in qualifying rural areas up to 100% financing. USDA also permits certain closing costs and customary purchase expenses to be included in the transaction, subject to program requirements.
But 100% financing is not free financing. USDA’s current fee schedule lists a 1% upfront guarantee fee for a new Section 502 guaranteed loan and a 0.35% annual fee. Consequently, borrowers should compare the USDA loan’s complete cost with any conventional or other mortgage for which they qualify, rather than focusing only on the absence of a down payment.
The Stock Photo Girl – stock.adobe.com Is a lower rate or a lower down payment a better use of extra cash? Using your cash savings to buy discount points on your mortgage interest rate could also save you big money over the long run. A discount point is money paid upfront in exchange for a lower mortgage interest rate. One point costs 1% of the loan amount, although the amount by which a point lowers the rate depends on the lender, loan and mortgage market.
The value of a mortgage point is determined by how much you save in interest payments over time. Because mortgage interest compounds over the life of your loan, lowering the rate for long-dated loans — like the 30-year mortgage — can save you significant money. But that savings only happens if you keep the loan. If you sell or refinance before the accumulated monthly savings recover the upfront cost, the points may not pay off.
“The key is understanding the break-even point — how long it will take for the monthly savings from that lower rate to outweigh what you paid upfront,” says Birk. “If you’re planning to move or refinance before reaching that point, buying points might not make much financial sense.”
Let’s examine a hypothetical scenario. We have a couple who are getting a zero-down 30-year USDA mortgage at 7%. The house they are buying costs $450,000. Including all the USDA fees in the calculation, we have two scenarios: one where the buyer puts $9,000 toward mortgage points and one where the buyer puts $9,000 toward the down payment. For this scenario, we will assume the $9,000 buys approximately 2 discount points (costing ~2% of the loan amount), which realistically drops the 7.00% interest rate to 6.50%.
Because of the length of the loan, the couple saves $32,850 over 30 years.
Another option is to make a larger down payment or additional principal payments. Paying principal reduces the outstanding balance on which interest is calculated, creating a predictable financial benefit equal to the mortgage interest that would otherwise accrue on that principal.
Then again, our couple may want to keep or invest the money. On one hand, investments may generate returns greater than the mortgage rate over a long period. According to Tradethatswing, the annualized stock market return with dividends reinvested for the last 30 years has been 10.44%. But stock market returns aren’t guaranteed.
Before closing, the practical move is to run the mortgage numbers several ways.
Ask lenders to price a zero-down loan and at least two alternatives, such as 5% and 10% down. Compare the interest rate, annual percentage rate, monthly principal and interest, mortgage insurance, discount points, government program fees, closing costs and total cash required.
Also look at whether the mortgage carries a prepayment penalty. If it doesn’t, you may be able to use excess savings to reduce your principal by adding to your monthly payment, if you discover six months after buying the home that your cash reserves are larger than necessary.
The reverse is much harder. A homeowner who puts most available cash into the house at closing cannot simply ask the lender to return part of the down payment when the air conditioner fails or income drops.
For buyers who already have substantial savings, zero-down financing is best viewed as a financial tool rather than an instruction to borrow every available dollar. Account for closing costs, repairs and emergency reserves first. Then compare the guaranteed savings created by a smaller mortgage or lower rate with the liquidity and other opportunities that keeping the money provides.
The important part is that your decision should come from the loan price, your cash needs, the taxes you’ll have to pay and your risk tolerance, not from the assumption that having savings means those savings automatically belong in the house.
This article was written by Brooklyn-based financial journalist and Commerce Editor for the New York Post Will Kenton. Specializing in investing, personal finance and retirement planning, Will’s expertise is rooted in behavioral economics — a field he explored as associate editor of the New School Economics Review. Will aims to help readers navigate the “predictable irrationality” that influences financial decisions, providing practical real-world solutions to student loan debt, investments, mortgages and more. Before joining The Post in 2026, Will covered the intersection of money, economics and culture for Investopedia, AP News, Business Insider and TIME Stamped.
