A down payment is an upfront payment made when purchasing a high-value item, typically a home or vehicle. For home purchases, the down payment is expressed as a percentage of the purchase price. A larger down payment reduces the loan amount, monthly payments, and total interest paid. For conventional mortgages, a 20% down payment is traditionally recommended because it eliminates the need for private mortgage insurance (PMI), though many loan programs allow down payments as low as 3-5%.
Down Payment
Definition
A down payment is an upfront payment made when purchasing a high-value item, typically a home or vehicle. For home purchases, the down payment is expressed as a percentage of the purchase price. A larger down payment reduces the loan amount, monthly payments, and total interest paid. For conventional mortgages, a 20% down payment is traditionally recommended because it eliminates the need for private mortgage insurance (PMI), though many loan programs allow down payments as low as 3-5%.
Example
On a $400,000 home: A 20% down payment ($80,000) means a $320,000 mortgage with no PMI. A 5% down payment ($20,000) means a $380,000 mortgage plus PMI of approximately $150-$250/month until you reach 20% equity. The 20% down payment saves approximately $45,000-$75,000 in PMI and interest over the loan term.
Key Points
- 120% down eliminates private mortgage insurance (PMI)
- 2FHA loans require as little as 3.5% down; VA loans may require 0%
- 3Larger down payments result in lower monthly payments and less total interest
- 4Down payment assistance programs exist for first-time homebuyers
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