What is a Down Payment?
A down payment is the initial payment a borrower puts toward a large purchase, and is usually a specified percentage of the total purchase price. Down payments are typically used for real estate, cars and other big-ticket items that are not usually paid in full at the time of purchase; the remainder of the purchase amount is paid back over time through a loan.
Down Payment on a House: Example
Before letting you borrow money for a house via a home loan, a lender will usually ask you as a potential borrower to make an immediate down payment on the home, which gives them some assurance that you're serious about owning the property.
How much is the down payment for a house? Almost all mortgage lenders require borrowers to make a down payment, typically ranging from 3% to 20% of the total purchase price of the home.
Let's walk through an example. Let's say you want to buy a $400,000 home. After being approved for a home loan, the lender agrees to let you borrow $360,000 for the home if you put 10% down. That means you'd need to pay $40,000 of your own money as a down payment ($40,000/$400,000 = 10%) to get the lender to agree to finance the rest of the home purchase.
You can put different down payment amounts into a mortgage calculator or amortization calculator to find out how much your monthly payments would be. For example, a 30-year fixed-rate mortgage with a 5% annual percentage rate (APR) for $360,000 would translate to a monthly payment of $1,933.
How Much of a Down Payment Do I Need for a House?
While some mortgages such as FHA home loans only require a down payment of 3.5%, it's a good idea to put as much down in cash as you can afford.
Here's why. The larger the down payment you can make, the smaller the loan amount you'll need from the lender. A smaller loan often means less risk for the lender, and therefore you're more likely to get a mortgage with a lower annual percentage rate (APR) and enjoy lower monthly payments -- all of which could save you tens of thousands of dollars in interest charges as we discuss in 4 Savings Tips Mortgage Lenders Don't Want You to Know.
If you can afford to put down 20% of the purchase price of the home, you can skip having to pay for private mortgage insurance (PMI), which can cost you $60 to $100 per month for every $100,000 financed on a new home. The PMI costs, which are usually lumped into your mortgage payments, won't go away until the your equity in the home reaches 20% of the original purchase price or more.
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