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What is a down payment for a house?
A down payment on a home is part of the purchase price of a home that is not paid on a mortgage.
The more money you spend, the less you will be taking out for a mortgage and the more stocks you have in your household from the start. For example, if you buy a $400,000 home and lower the 10% rate, you’d take out a mortgage for $360,000, and take 10% minus $40,000, or $40,000.
How does down payment work?
Most mortgage types require a certain down payment. You can close your down payment when you close. If you create a serious money deposit – the first “good faith” deposit made when your home offer is accepted – it applies to your down payment.
The down payment fund will then be transferred to an escrow account managed by a real estate attorney or a settlement officer. This third party will pay the funds to the seller who will ultimately receive the down payment.
Down payment requirements protect both home buyers and mortgage lenders. When a buyer donates their funds to the purchase of a home, they are much more likely to pay off their mortgage and maintain the home.
For buyers, the down payment will also be converted to immediate stocks that can be leveraged later on the stock line or second mortgage.
Additionally, that equity protects you from being underwater – when the homeowner owe more on the mortgage than the value of the home.
For lenders, a larger down payment is less risky. Homeowners will stop paying off their mortgages and lenders will lend out the lenders they need to seize, minimizing hits.
In general, a larger down payment will help you to approve your mortgage and allow you to buy more homes with the same monthly payment or less. You also qualify for a lower interest rate and save money in the mortgage process.
Examples of down payments
This is a breakdown of a 30-year fixed-rate mortgage at 6.5% interest rate for a $375,000 home. It uses Mortgage Calculator data and Freddie Mac PMI Calculator mortgage insurance quotes.
| Home prices | down payment | Monthly principal and interest | Monthly PMI | Total monthly payment |
|---|---|---|---|---|
| $375,000 | $11,250 (5%) | $2,299 | $342 | $2,641 |
| $375,000 | $37,500 (10%) | $2,133 | $219 | $2,352 |
| $375,000 | $56,250 (15%) | $2,014 | $89 | $2,103 |
| $375,000 | $75,000 (20%) | $1,896 | $0 | $1,896 |
This example does not take into account the potential interest savings associated with a larger down payment. For example, a 20% down payment may qualify for a lower interest rate compared to the interest rate offered with a 10% down payment.
How to choose the best price
While larger down payments have profits, it is not necessarily the best decision for all home buyers. Consider these advantages and disadvantages:
Tips for saving your down payment
- budget: Look at your monthly income and identify areas where you can reduce your spending while saving, or temporarily suspend your spending.
- Be strategic about where to place your savings: Store your money somewhere that offers returns, such as a high-yield savings account or a certificate of deposit (CD). Use the CD and keep your timeline in mind. If you know you’ll buy a house earlier than you would later, you may not want to save for example on a five-year CD.
- Automation: Set up automatic tellerships in your savings account through your employer (if you receive a direct deposit salary) or through your bank.
- Exploring support programs: Find out what mortgage down payment support options, such as grants, low interest rates, and deferred loans.
- Don’t wait for the wind to blow: The key to saving your down payment is to get started as soon as possible, even if you don’t plan on buying a house at any time.
