What Is a Down Payment?

A down payment is a sum a buyer pays upfront when purchasing an expensive good such as a home or car. It represents a ꦓpercentage of the total purchase price, and the balance is usually financed. A down payment can significantly reduce the amount the borrower owes to the lender, the amount of interest they will pay over the life of the loan, and monthly payment amounts.

How Down Payments Work

Buyers commonly pay a down payment when purchasing a home or car. The average first-time home buyer pays 6% of the home price as their down payment and takes out a mortgage from a bank or other financial institution for the remainder.

For car purchases, it is common to pay a down payment of at least 20% of a new car's price. Because the value of a car depreciates quickly, a high down payment ensures buyers do not owe more than the car is worth after a year or two. Like mortgages, car loans often carry interest, and a down payment reduces the interest paid over the life of the loan.

Types of Down Payments

Home Purchases

In the United States, a 20% down payment on a home has been the standard. Because a buyer's 澳洲幸运5官方开奖结果体彩网:credit score, income level, and 澳洲幸运5官方开奖结果体彩网:debt-to-income ratio help determine a loan's interest rate, borrowed amount, and terms of the mortgage, 澳洲幸运5官方开奖结果体彩网:a larger down𓆉 payment can be be🌼neficial.

For 2023, the minimum down payment is 3% for conventional home loans per rules set by government-sponsored entities 澳洲幸运5官方开奖结果体彩网:Fannie Mae and Freddie Mac. For 澳洲幸运5官方开奖结果体彩网:FHA loans that help low- to moderate-income families attain homeownership, the minimum down payment is 3.5%. The lowest down payment requirements commonly carry income limits.

Auto Purchases

For car purchases, a down payment of 20% or more can make it easier for a buyer to be approved for a loan and get a better interest rate and other terms. Car dealers may also offer promotional terms of 0% down for buyers who qualify. While that means no down payment is necessary, the lender may charge a higher interest rate.

Benefits of a Large Down Payment

A significant💯 down payment decreases the amount of interest paid over the life of th♌e loan and lowers monthly payments.

• Interest: A $100,000 loan with a 5% interest rate means $5,000 in interest in the first year. However, with a $20,000 down payment and a loan of only $80,000, first-year interest will be just $4,000. For a 30-year mortgage loan, borrowing $100,000 at 5% interest costs $93,256 in interest. Borrowing just $80,000 saves nearly $20,000, with a total interest cost of $74,605.
• Monthly Payments: A larger down payment reduces monthly payments. A $100,000 loan at 5% interest carries monthly payments of $537, while an $80,000 loan has a payment of $429.
• Mortgage Insurance: Private Mortgage Insurance (PMI) is usually required when you have a 澳洲幸运5官方开奖结果体彩网:conventional loan and make a down payment of less than 20 percent of the home’s purchase price. PMI serves to protect the lender if the buyer stops making payments on the loan. Borrowers can request the lender 澳洲幸运5官方开奖结果体彩网:drop the PMI requirement once the 澳洲幸运5官方开奖结果体彩网:equity in the home reaches 20%.

Paying Off a Loan

Homeowners unable to put down a large down payment can plan to make additional payments toward their mortgage principal each month, reducing the loan amount and interest over time. This is often referred to as making 澳洲幸运5官方开奖结果体彩网:accelerated payments or 澳洲幸运5官方开奖结果体彩网:accelerated amortization. Buyers may choose to 澳洲幸运5官方开奖结果体彩网:refinance their mortgage if their finance♔s impr𒀰ove and make a larger down payment on the new loan.

The Bottom Line

A down payment is a sum a buyer pays upfront when purchasing a home or car and is a percentage of the total purchase price. The higher the down payment, the less the buyer will need to borrow to complete the transaction, the lower their monthly payments, and the less they'll pay in interest over the long term.