What is a Down Payment?

Down payments are a portion of the cost of a home, paid up front. Generally, the more you put down, the lower your interest rate and monthly payment.

Why?

The down payment is effectively your investment in your home. When you put more money down, you’re taking on a portion of risk from the lender, who can reciprocate by giving you better mortgage rates.

A Standard Down Payment

To get the lowest mortgage rates, you’ll typically need a down payment of at least 20 percent of the home’s purchase price.

Most lenders are looking for 20% down payments. That’s $60,000 on a $300,000 home. First off, you’ll have a better chance of getting approved for a loan. And you’ll earn a better mortgage interest rate. There are all sorts of other benefits too:

  • Lower upfront fees
  • Lower ongoing fees
  • More equity in your home
  • A lower monthly payment

The down payment is not the only upfront money you have to deal with. There are loan closing costs and earnest money to consider as well. Before the dramatic music returns, let’s explore some lower down payment options.

However, it’s not uncommon to purchase a home with a down payment of 15 percent, 10 percent, or even less. Some government-backed loans, like FHA mortgages and VA loans, may be available to qualified home buyers with little or no down payment. However, with some of these loans, you may be required to pay for mortgage insurance. It’s a good idea to understand the different types of mortgage loans and their requirements before purchasing a new home.

There’s one more good reason to make a higher down payment. The more you pay up front, the less you’ll owe on your mortgage in the long run. The amount of your down payment is subtracted from the total cost of a house, your loan amount will be smaller with a larger down payment and so will your monthly payments.

Statistics credit: US Bank