Down Payment
A down payment is the upfront portion of a home’s purchase price. Learn why down payments reduce loan amounts, interest costs, and PMI requirements.
Definition
A down payment is an upfront sum a buyer pays when purchasing a home, expressed as a percentage of the purchase price. According to Investopedia, down payments reduce the amount financed and can lower interest costs and monthly payments. A larger down payment may help buyers secure better loan terms, avoid private mortgage insurance (PMI) when putting down at least 20% on a conventional loan, and reduce the overall cost of borrowing. Typical down payments range from 3% for certain conventional loans to 3.5% for FHA loans, with 20% historically considered standard. Buyers should balance the benefits of a large down payment against liquidity needs and investment opportunities.
Why It Matters
Every $10,000 you add up front shaves roughly $60 off the monthly payment, and crossing 20% on a conventional loan ends PMI entirely, which runs $150 to $300 a month on a median-priced Puget Sound home. Put too much down, though, and you close with no cushion, so the first failed furnace goes on a credit card at 24%.
Examples
A buyer with $95,000 saved for a $475,000 house puts 20% down, avoids $178 a month in PMI, and finances $380,000.
Someone using the Washington State Housing Finance Commission's Home Advantage program pairs a 3% down conventional loan with second-position assistance, showing up at closing with about $6,000 of their own cash on a $400,000 purchase.
A couple drains savings to $2,000 to reach 20%, then hits a $9,400 sewer line replacement in month four.
Tips
Price the same house at 10% and 20% down side by side, and compare total cost over the years you actually plan to stay, not over the full 30.
Know both PMI exits: conventional PMI terminates automatically at 78% loan-to-value on the original amortization schedule, but you can request cancellation at 80% once you get there.
Season your funds. Gift money and large deposits have to be documented, so move cash into the account you will close from at least 60 days before you write an offer.
Related Terms
FHA Loan
An FHA loan is a government-backed mortgage with low down payment requirements. Learn eligibility cr...
Private Mortgage Insurance (PMI)
Private mortgage insurance protects lenders when borrowers make low down payments. Learn how PMI wor...
Equity
Equity is the difference between a home’s market value and the mortgage balance. Learn how equity gr...
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