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What is a down payment, and how does it work?
When you use a mortgage loan to buy a house, more often than not, you’ll need a down payment to make it happen. These up-front, one-time payments can be quite a signifcant chunk of money. In fact, the typical down payment in June 2024 clocked in at $67,500, according to real estate brokerage Redfin.
Still, down payments aren’t set in stone — and the exact amount you’ll need for your home purchase could be vastly different depending on your lender and type of mortgage. Are you buying a house soon? Here’s what you need to know about down payments before you do.
In this article:
Down payment definition
A down payment is the initial up-front amount you provide when buying a house (unless you’re paying in all cash). The remainder of the home’s purchase price is then covered by your mortgage loan, which you’ll pay off via monthly payments over many years.
A down payment basically acts as your skin in the game. It is the stake in the home you actually own outright upon purchase. For example, if you make a 5% down payment, you have 5% equity in your home right off the bat. Then, you’ll borrow the remaining 95% and gain more equity as you pay down the home loan.
Generally speaking, larger down payments make it easier to buy a home and can reduce your mortgage interest rate and monthly payment. Smaller down payments often mean the opposite.
How much of a down payment do you need?
The exact amount you’ll need to put down depends on many factors, including the type of mortgage you’re using, your budget, and your financial qualifications as a borrower. See below for how all of these can impact your down payment amount.
Type of mortgage
The first big determinant is your mortgage loan program. Depending on what type of loan you choose, minimum down payment requirements can range anywhere from 0% to 10% (or 20% if you want to avoid private mortgage insurance).
Here’s a breakdown of down payment requirements by loan program:
These are the rules of thumb, but mortgage lenders may impose their own rules about down payments.
Dig deeper: Zero-down mortgage — How to buy a house with no down payment
Budget and financial goals
Your personal finances and long-term goals also matter when deciding how much to put down on a house. That’s because your down payment directly impacts your monthly payment. Make a larger one, and you need to borrow less from your lender. That equates to a smaller monthly payment and, in most cases, a lower interest rate too.
On a conventional loan backed by Fannie Mae, for instance, a 25% down payment might qualify you for a 6% interest rate. But if your down payment falls to 15%? You’d add at least 0.375% to your rate, according to current pricing standards. On a $400,000, 30-year loan, that’d equate to nearly $100 more per month and $35,000 more in interest of the loan’s term.
So, if your goal is to minimize your monthly mortgage payment and long-term interest costs, a larger down payment is often the way to go. It also helps you avoid private mortgage insurance, which will lower your monthly payment as well.
It’s important to think about where those funds would come from, though, before coughing up a huge down payment. If, for example, making a 20% down payment would drain your savings dry, it might not be a smart move. For one, you’ll need funds for home maintenance (according to the home services website Thumbtack, the average is $6,663 per year), as well as cash for unexpected emergencies that might crop up. And don’t forget closing costs. You can typically expect to pay between 2% and 5% of the sales price in closing fees.
Qualifications
The financial qualifications you bring to the table are also important. If you have a low credit score or a very high debt-to-income ratio (DTI), for example, it may be hard to qualify for a loan. Because a larger down payment means the lender has to loan you less — and gives you a smaller, more affordable monthly payment — it reduces the risk they take on with you as a borrower. This could make it easier for you to qualify on the whole.
Lenders also use your credit score to determine how much you pay in interest. So if you come in with a very low score and a small down payment, it can mean a much more expensive loan in the long run.
Pros and cons of larger down payments
Making a big down payment has benefits and disadvantages. For one, it can make it easier to qualify for your loan and potentially get you a better interest rate, which will save you money in the long run.
It also helps you avoid private mortgage insurance, which is added to conventional loans if your down payment is less than 20%. This typically comes out to about $30 to $70 more per month for every $100,000 you borrow.
Finally, a larger down payment reduces your loan balance and monthly payment. This can make it easier to stay on top of your payments or free up cash flow for other financial goals.
On the downside, making too large of a down payment could make it harder to weather a financial storm, as it could drain your savings. It could also mean delaying your home purchase as you save more money — and potentially delaying building wealth since you will spend that time saving for the down payment instead of gaining equity in your home.
Read more: Believe it or not, you can buy a house with just 1% down
Ways to increase your down payment
Saving for a down payment can be challenging, but there are ways to make it easier — and speed up the rate at which you save.
Here are a few strategies to consider trying if that down payment feels out of reach:
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Use a high-yield savings account: High-yield savings accounts can earn you much more in interest than traditional savings accounts. The national average savings rate is less than 0.50%. However, the best high-yield savings accounts offer rates of 4% or higher.
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Ask for help from family: Some mortgage programs allow you to use gift funds toward your down payment. Just make sure the donor is willing to sign a statement saying the money is not a loan that needs to be repaid.
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Use windfalls carefully: If you get any windfalls — holiday bonuses, tax refunds, or birthday money — consider putting it straight into your high-yield savings account.
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Use retirement accounts: You may be able to withdraw up to $10,000 from your retirement account, if you have one. Talk to a tax professional or financial adviser if you’re considering this.
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Look for down payment assistance: Many states, communities, and non-profit organizations offer down payment and closing cost assistance programs. Ask your loan officer if you are eligible for any of these programs.
You can also delay your home purchase until you have more saved up. If you’re not sure what the right path toward homeownership is for you, talk to a financial adviser for personalized guidance.
What is a down payment? FAQs
How does a down payment work?
A down payment is an initial up-front payment you’ll make toward a house. If a house costs $500,000, for instance, you might make a down payment of $50,000. Your mortgage loan would then cover the rest of the price ($450,000).
What is the down payment for a $200,000 house?
That depends on what type of mortgage loan you’re using. If you use a VA or USDA loan, you won’t need a down payment. With a conventional loan, you’ll need at least $6,000 down (3%). For an FHA loan, it’s $7,000 (3.5%) to $20,000 (10%), depending on your credit score.
Do you have to put a 20% down payment on a house?
You do not have to put 20% down on a house. If you’re using a conventional loan, though, a 20% down payment will allow you to avoid paying for private mortgage insurance, which typically adds $30 to $70 to your monthly payment for every $100,000 you borrow. But keep in mind that PMI doesn’t last forever. There are several ways to eliminate PMI after some time has passed.
This article was edited by Laura Grace Tarpley.
