What Is A Down Payment? | Rocket Mortgage

A down payment is a percentage of the purchase price that you pay out of pocket. Learn how they work and how much you should put down on a house. Home Learn WhatIsADownPayment DownPayment:WhatIsItAndHowDoesItWork? VictoriaAraj5-minuteread November03,2021 Share: Ifyou’rereadytoputrentingbehindyouandtryyourhandatbuyingahouse,agreatfirststepistosaveforadownpayment.Buthowmuchmoneydoyouneed?Howcanyousaveforadownpayment?Whydoyouneedadownpaymentatall? We’vecreatedaquickguidethatwillhelpyouunderstanddownpayments,whythey’reusuallyrequiredandhowmuchyoushouldputdowntobuyahome. DownPaymentDefinition Adownpaymentonahouseisalargesumofmoneythatthebuyerpaysupfrontinarealestatetransaction.Theamountpaidisusuallyapercentageofthepurchasepriceandcanrangefromaslittleas3%toasmuchas20%forapropertybeingusedasaprimaryresidence. Therequireddownpaymentisusuallydeterminedbythetypeofmortgageyouchoose,butyourfinancialsituationandthetypeofpropertyyou’rebuying(whetherit’syourprimaryresidenceoran investmentproperty,forexample). Thetypeandcondition–HomePathproperty,foreclosedhomeorashortsale–doesn'taffecthowmuchyouhavetoputdown. Takethefirststeptowardtherightmortgage. Applyonlineforexpertrecommendationswithrealinterestratesandpayments. IWantToBuyAHome I’dLikeToRefinance HowDoDownPaymentsWork? Theamountyoudecidetopayforadownpaymentcandictatethetermsforafewdifferentaspectsofyourmortgagerepaymentprocess. Alargerdownpaymentonahouse,forinstance,maygetyouintoamoreexpensivepropertyoralowerinterestrate.However,therearealsoreasonsyoumaywanttoputdownless.Let’slookathowyourdownpaymentcanaffecttheconditionsofyourloan. DoesYourDownPaymentAffectYourInterestRate? Thesizeofyourdownpaymenthasadirectimpactontheinterestrateyourmortgagelenderwillsetforyourloan.Thelargerthedownpaymentyouofferyourlender,theloweryourinterestratemaybe.Alargerdownpaymentgenerallymeansyou’realessriskyborrower,andalessriskyborrowermeansalowerinterestrate. Alowerinterestratewillhelpyousaveonyourmonthlypaymentandallowyoutopaylessinterestoverthelifeoftheloan.Ontheotherhand,ifyoudecidetoputdownlessmoneyupfront,youmightendupwithahigherinterestrateonyourloan. DoesYourDownPaymentAffectYourMonthlyMortgagePayments? Justasittypicallyresultsinalowerinterestrate,alargerdownpaymentusuallymeanssmallermonthlypayments.Sincethebalanceofyourloanisless,yourmonthlypaymentsaresmaller. Let’ssayyouwanttopurchasea$300,000homewithadownpaymentof10%($30,000)ona30-yearmortgage.Thebalanceofyourloanwouldbe$270,000,withpaymentsdividedbetween360months.Withoutconsideringinterest,taxesorinsurance,yourmonthlypaymentinthisexamplewouldbeabout$750. Now,let’ssaythatyouputdown20%instead.Thiswouldlowertheprincipalamountonyourloanto$240,000.Ona30-yearmortgage,yourmonthlypaymentwouldbeabout$667(excludinginterest,taxesorinsurance). Thoughyou’dpaymoreupfront,theprincipalportionofyourmonthlypaymentswouldbeabout$83less.Thatmightnotseemlikemuch,butit’salsonotthefullpicture.A20%downpaymentcouldsaveyouhundredsofdollarsamonthonmortgageinsurance,anditcouldalsomeanabetterinterestrate. Foracloserlookathowyourmonthlypaymentcanbeaffectedbythesizeofyourdownpayment,tryamortgagecalculator.You'llentersomebasicinfotogetanestimatedmonthlypayment,andyoucanadjustdownpaymentamountstoseewhatworksbestforyou. HowToDecideOnTheRightDownPayment Bothlargeandsmalldownpaymentshavetheirownuniquesetofbenefits.It’simportanttoweighthemcarefullyandtakeintoaccountyourownpersonalfinancialsituationandgoalsbeforemakingadecision. BenefitsOfALargeDownPayment LowerRatesAndPremiums Lenderslovetoseelargedownpaymentsbecauseitlowerstheriskyouposetothem.Thelargeryourdownpayment,thelessyouhavetopayeachmonthinbothprincipalandinterest.Thinkofadownpaymentasaninterest-freewaytogetajump-startonpayingoffyourhome. AvoidMortgageInsurance Certaintypesofloansrequireyoutopaymortgageinsurance.Onaconventionalloan,yougenerallyneedtoput20%downtoavoidpayingprivatemortgageinsurance,whichisusuallyamonthlyfeethatyoupayaspartofyourmonthlypaymentorispaidupfrontbythelenderinexchangeforaslightlyhigherinterestrate.OnanFHAloan,20%downcouldbethedifferencebetweenpayingformortgageinsuranceforthelifeofyourloanandpayingmortgageinsuranceforjustthefirst11years. LowerDebt-To-IncomeRatio(DTI) AlowerDTImeansyoumayhavemoreborrowingpowerinthefuture.DTIrepresentshowmuchofyourmonthlyincomegoestowardpayingoffdebt.AhighDTIcanpreventyoufromgettingotherloansorcredit.(MostmortgagelenderslookforaDTIofabout45%orlower.)Ifyou’relookingtotakeonotherloansorbuyasecondhome,thenborrowingless(byputtingmoredown)couldkeepyourDTImanageable.  BenefitsOfASmallDownPayment BuySooner A20%downpaymentcantakeyearsorevendecadestosavefor,dependingonyourincome.Alowerdownpaymentcanhelpyouownahomesooner. MoneyForRepairsAndRenovations Emptyingoutyoursavingsforyourdownpaymentmightnothelpinthelongrun.Asanewhomeowner,youmayfindthatyouneedmoremoneyforrepairsandrenovationsthanyouthought.Settingasidethismoneyupfrontcanmakehomeownershiplessstressful. KeepAnEmergencyFund Youwon’thavetodipintoyouremergencyfund.Keepingsomemoneyinthebankforemergenciesisasmartmove.Youdon’twanttohavetopayforunexpectedcarrepairsormedicalbillsoncredit.Hangingontosomeofyourmoneycouldgiveyoupeaceofmindandbeacheaperwaytocoveremergencycosts. MoneyForOtherVentures Considertheopportunitycostofputtingdownmoremoneyonyourhomeonthefrontend.Thoughyoumightbeabletogetalowerinterestrateandmonthlypayment,itmightmakemoresenseforyoutousethatmoneyforcollegetuition,investingorsomethingelse. TheMinimumDownPayment Youmayhaveheardthatyouneeda20%downpaymenttobuyahome.Formanybuyers,a20%downpaymentisn’trealistic.Fortunately,20%downisnolongertheindustrystandard. Theaveragedownpaymentpaidforamortgageisabout6%. Overtheyears,theindustryhaschangedtomakehomeownershipmoreaccessible.It’snowpossibletogetamortgageforaslittleas3%down,althoughsomeloans(likeVAloansandUDSAloans)requirenomoneydown.  Keepinmindthatdependingonyourlocation,andyourleveloffinancialneed,theremayalsobedownpaymentassistanceoptionsworthlookinginto. WhyLendersTypicallyRequireADownPayment Whenyourmortgagelendergivesyoualoan,they’retakingariskonyou.Ifyoustopmakingmortgagepayments,it’spossiblethatthelenderwon’tbeabletomakebackthemoneytheylentyou.  ADownPaymentMakesYouLessRiskyToLendTo Puttingmoneydownhelpsmitigateriskforthelenderinacoupleofways: Itrepresentsyourinvestmentinthehome.Ifyouweretostopmakingpaymentsonthehome,you’dbewalkingawayfromthethousandsofdollarsyouputintoit. Itlowerstheamountthelenderhastogiveyouforthepurchase.Ifyou’repaying20%ofthepurchasepriceofthehome,andthey’reonlylendingyou80%,thenthat’slessmoneythey’llneedtoworryaboutgettingbackifyoustoppaying. It’simportanttonotethatthedownpaymentrequirementisn’tsetbythelenderalone.Inmanycases,thedownpaymentrequirementcomesfromtheinvestoroftheloan(whichmaybetheFederalHousingAdministration,FannieMae,theDepartmentofVeteransAffairsorsomeoneelse). TheBottomLineOnDownPayments Thoughadownpaymentisacrucialpartofyourhomeloan,it’sonlyasmallpieceoftheoverallfinancialpicture.Knowingthedownpaymentamountyou’recomfortablewithcanhelpyousearchforhomesthatarewithinyourbudgetandkeepyoufromcuttingtoodeeplyintoyouremergencysavings.Togetapprovedforyourmortgagesoyoucanstarthousehunting,applywithRocketMortgage®now. Takethefirststeptowardtherightmortgage. Applyonlineforexpertrecommendationswithrealinterestratesandpayments. IWantToBuyAHome I’dLikeToRefinance SeeWhatYouQualifyFor VictoriaAraj VictoriaArajisaSectionEditorforRocketMortgageandheldrolesinmortgagebanking,publicrelationsandmoreinher15+yearswiththecompany.Sheholdsabachelor’sdegreeinjournalismwithanemphasisinpoliticalsciencefromMichiganStateUniversity,andamaster’sdegreeinpublicadministrationfromtheUniversityofMichigan. RelatedResources 11WaysToSaveForAHouse:TipsAndTricksToFundYourDownPayment HomeBuying-11-minuteread PatrickChism-September10,2021 Lookingtobuyahousebutneedhelpfundingthatdownpayment?Checkoutourbesttipsandadvicetohelpyousaveforahouse. ReadMore WhatIsCashToClose? HomeBuying-5-minuteread AndrewDehan-November12,2021 You’vefoundtheperfecthome.Next,you’llneedtoknowyourcashtocloseamountandsignonthedottedlineforyourmortgage.Let’sgooverthesestepsindetail. ReadMore HowToBuyASecondHomeWithNoOrLowDownPayment 6-minuteread MelissaBrock-September10,2021 Doyouneedagetawayplaceofyourownbutdon’tknowhowyoucanaffordit?Learnsomewaystobuyasecondhomewithnoorlowdownpayment. ReadMore