What Is A Down Payment And How Does It Work?

One of the first steps on your home buying journey is saving up for a down payment. How much you need to save can depend on certain factors. There are also benefits to making a larger down payment versus a smaller one, and vice versa. Use our guide below to understand what a down payment is, why you usually need to save for one and how much you should put down to buy a home.

What Is A Down Payment On A Home?

A down payment on a house is the money a buyer pays upfront to complete the real estate transaction. Down payments are typically a percentage of a home’s purchase price and can range from 3% – 20% for a primary residence.

The required down payment is usually determined by the type of mortgage you choose, your financial situation and the type of property you’re buying (a primary residence or an investment property, for example).

How Do Down Payments Work?

The amount you put toward a down payment can influence the loan amount you qualify for and the terms of your mortgage repayment. Putting money down on a house also helps lower your total loan amount. The less money you borrow, the more money you save on interest over the life of the loan.

A larger down payment may also help you purchase a higher-priced home or get a lower interest rate, but first-time home buyers may have trouble saving up that much money. There are also reasons to put down less on a house, which we’ll get into later.

Your mortgage down payment is made at closing, though it’s separate from your closing costs. The down payment funds are held in escrow until the sale is complete, at which point they’re disbursed to the seller.

Why Lenders Typically Require A Down Payment

When your mortgage lender gives you a loan, they’re investing in you. As you likely know, all investments come with some degree of risk. A lender’s risk is that a borrower may stop making mortgage payments, and they won’t recover the money they loaned.

Here are some ways putting money down can help a lender feel more confident about a borrower’s ability to repay their home loan:

• It represents your investment in the home. If you stop making mortgage payments, you’ll be walking away from the thousands of dollars you invested in the property with your down payment.
• It lowers the mortgage loan amount. If you make a down payment that’s 20% of the home’s purchase price, the lender only has to lend you 80% of the purchase price. That’s less money they’ll be entrusting you to repay.

It’s important to note that down payment requirements aren’t solely determined by l