A down payment is the initial amount of money a buyer pays upfront when purchasing a home or other large asset. It represents a portion of the purchase price, while the remainder is typically financed through a loan such as a mortgage.
How It Works
The buyer provides the down payment at the time of purchase, and the lender covers the balance with a loan. For example, if a home costs $300,000 and the buyer makes a 20% down payment ($60,000), the mortgage will cover the remaining $240,000.
Typical Amounts
- Conventional mortgages: Often require 5% to 20% of the purchase price as a down payment.
- Government-backed loans: May allow smaller down payments (as low as 0% to 3.5%).
Why It Matters
The size of a down payment affects the loan amount, monthly payments, and the overall interest paid. A larger down payment reduces the lender’s risk, often resulting in lower interest rates and eliminating the need for extra fees like mortgage insurance.
Final Thoughts
Making a larger down payment can provide financial advantages, but it also means tying up more of your savings upfront. The right choice depends on balancing affordability today with long-term cost savings.