A Guide to Understanding Down Payments

First-time homebuyers often struggle to wade through the terminology and overcome the contractual hurdles that come between them and holding a “SOLD” sign in the front yard. Real estate agents, inspectors, and local lenders all want the same thing you want: for you to close on your new home. At First Lenders we are committed to helping you get where you want to be. 

One of the first questions you are asked when talking to a lender is concerning your down payment. For those signing a mortgage for the first time, understanding what a down payment is and the repercussions it can have on the financial details of your loan is very important. 

What is a “down payment”?

A “down payment” is a portion of the cash that you pay upfront on a purchase that is primarily funded by a loan. For most lenders–both local lenders and national banks–a down payment is necessary on a large loan or mortgage. The initial payment goes towards the balance of the loan. A down payment lowers the total amount financed and, thereby, your monthly payments. 

down payment

For instance, if you are purchasing a house for $200,000, you might pay a down payment of $10,000 (5%) upfront. Your lender would finance the loan for $190,000 (+/- closing costs and other expenses depending on your particular agreement). 

How much should I put down? 

How much money you put down is determined in large part by the amount of money you want to finance. On a home loan, a down payment is typically between 5% and 20% of the final purchase price. Some special, first-time-home-buyer loans and Federal Housing Authority loans only require down payments of 3%. 

Should I put more money down or less? 

How much money you should put down depends on several factors. If you have sufficient funds in savings and can maintain enough in your account to cover emergency expenses, then a larger down payment will increase your equity and lower your monthly payments–or decrease the length of the loan. In fact, putting down at least 20% on a home mortgage will prevent you from needing mortgage insurance, which lowers your payment even more. 

On the other hand, if putting down 20% would completely deplete your savings and leave you in a financial tenuous condition, it might be best to start with a smaller down payment and pay more towards your principal balance over time. 

If you’re wondering what course of action is right for you or have more questions about down payments, contact First Lenders.