Down payment

A down payment is the buyer's share of the price, paid on the day the loan is made. On a $320,000 home a 10% down payment is $32,000, and the mortgage is written for the other $288,000; the percentage is the buyer's choice within the loan's rules, and the same word applies to a car. Every dollar of down payment is a dollar not borrowed, so a larger one means a smaller loan, a smaller monthly payment, less interest over the life of the loan and, at 20% of the price on a conventional mortgage, no private mortgage insurance in the payment. It is also the equity you own on the first day.

In a sentence

• "A 10% down payment on a $320,000 home is $32,000, and the mortgage covers the other $288,000."
• "The down payment is not the closing costs. Those are a few percent more, in cash, on the same day."
• "They bought with a 5% down payment and paid mortgage insurance every month until the equity reached 20%."

How it works

1. Agree on a price. The down payment is a percentage of it, chosen within what the loan allows: some programs allow much less than 20%, and 20% on a conventional loan is the level at which no private mortgage insurance is charged.
2. Subtract the down payment from the price to get the loan. The monthly payment and the total interest follow from that figure.
3. Show where the money came from. Lenders review the accounts the down payment is drawn from, and a gift from family usually needs a letter saying it is not a loan.
4. Pay it at closing, by wire or cashier's check, with the earnest money deposited when the offer was accepted credited against it. Closing costs are paid the same day, on top.

Loan amount = price − down payment

Down payment = price × the percentage you choose

An example

The example assumes a $320,000 home, a thirty-year fixed mortgage at 6.5%, and private mortgage insurance at 0.5% of the loan a year while the down payment is under 20%; the rates are the example's inputs. Property tax and homeowners insurance are left out.

Going from 5% down to 20% takes $48,000 more cash at closing and returns $430 a month, $303 of it lower principal and interest and $127 of insurance never charged, plus about $61,000 less interest over the loan. Ten percent down takes $16,000 more than 5% and buys about $101 a month and about $20,000 of interest. On the 5% loan, the scheduled payments alone bring the balance under 80% of the price after about ten years, so without extra payments or a rise in the home's value the insurance runs for most of that time.

Why it matters

The down payment sets the shape of the loan for thirty years, and it is decided once. A larger one lowers every payment that follows, removes mortgage insurance, and leaves a cushion of equity if prices fall, so a home that has to be sold in a bad year can be sold without bringing money to the closing. A smaller one gets the keys years sooner and leaves the reserve intact. The mistake sits at both ends: waiting years for 20% when a smaller down payment and a few years of insurance would have cost less than the rent in between, or putting every saved dollar into the down payment and arriving at closing with nothing left for the costs, the move and the first repairs.

Down payment versus closing costs

The down payment goes toward the price; closing costs pay for the transaction. Lender fees, the appraisal, title insurance, prepaid property tax and homeowners insurance, and the first deposits into the escrow account are due at closing in cash, on top of the down payment, and they commonly run to a few percent of the price, so a buyer who has saved exactly the down payment is short by that amount on the day. Size the target as the down payment plus the closing costs plus a reserve for moving in, as How to save for a down payment while renting works through.

Common questions

How much should a down payment be? Twenty percent of the price avoids private mortgage insurance on a conventional loan and gives the smallest payment; some programs allow much less, and many buyers land in between. The right figure is the one that leaves the monthly payment comfortable, the emergency fund intact and a reserve for closing costs and moving in.

Is a down payment the same as earnest money? No. Earnest money is a deposit made with the offer, held by a third party until closing, and credited toward the down payment and closing costs on the day. The down payment is the full cash share of the price; the earnest money is a part of it paid early.

Can a down payment be a gift? Usually, on a home. Lenders accept gifts from family for some or all of the down payment on most loan types and ask for a letter from the giver stating that the money is a gift and not a loan. Who may give and how much may be a gift vary by loan program.

What happens to the down payment after closing? It becomes equity, the part of the home's value that is yours: the home's value minus the loan balance. Nothing leaves your net worth on closing day except the closing costs, because the cash that left savings became the same amount of equity, and from then on each principal payment and any rise in the home's value add to it. See Home equity.

Go deeper

• The Mortgage calculator estimates the full monthly payment on a home, principal and interest plus property tax, insurance, HOA dues and PMI, and the total interest over the life of the loan.
• How to save for a down payment while renting sizes the target from the price, the closing costs and a move-in reserve, and runs it as a fixed monthly line beside the rent.
• The Savings goal calculator works out what to set aside each month to reach the target by a date, with the account's interest counted along the way.

Where it shows up in Zypper

Zypper holds the down payment fund as a savings goal. Give the goal a category with its monthly share as the amount and turn on Roll over unspent budget, and the carried balance appears beside the amount and grows by the share each month, with a Starting balance for what has already been saved; the transfer that carries the month's saving to the savings account is recognized as a movement between your own accounts, not spending, and the account's balance counts toward net worth, charted over time. See Rolling over unspent budget and Net worth tracking for the details, or get started with Zypper to watch the target approach.