Down Payment
Quick Definition
An upfront cash payment made when purchasing a large asset, representing a percentage of the total purchase price.
Key Takeaways
- A 20% down payment avoids private mortgage insurance (PMI)
- Larger down payments typically result in lower interest rates
- FHA, VA, and USDA programs offer lower down payment requirements
- Down payment assistance programs exist for first-time homebuyers in many states
What Is Down Payment?
A down payment is the initial cash portion a buyer pays toward the purchase of an expensive asset, most commonly a home or vehicle. For mortgages, the down payment typically ranges from 3% to 20% of the home price, with 20% being the traditional standard to avoid private mortgage insurance (PMI). The size of the down payment affects loan approval, interest rates, monthly payments, and total borrowing costs. Larger down payments reduce the loan amount and demonstrate financial stability to lenders. Various programs exist to help first-time homebuyers with smaller down payments, including FHA loans (3.5% minimum), VA loans (0% for veterans), and USDA loans for rural areas.
Down Payment Example
- 1A 20% down payment on a $400,000 home is $80,000, eliminating the need for PMI and saving $150-250/month.
- 2An FHA loan requires only 3.5% down ($14,000 on a $400,000 home) but requires mortgage insurance for the life of the loan.
- 3Putting 10% down on a $35,000 car ($3,500) instead of 0% saves approximately $1,200 in total interest over a 5-year loan.
Related Terms
Mortgage
A loan secured by real property used to purchase a home, typically repaid over 15 to 30 years.
Pre-Approval
A lender's conditional commitment to provide a specific loan amount based on verified financial information.
Escrow
A financial arrangement where a neutral third party holds funds or documents until specific conditions are met.
Closing Costs
Fees and expenses paid at the finalization of a real estate transaction, beyond the property's purchase price.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Personal Finance Terms