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Mortgage down payment - What is it, who it goes to and where it comes from

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What is a down payment on a home?

The down payment is money you give to the home's seller. The rest of the payment to the seller comes from your mortgage. Down payments are expressed as percentages. A down payment of at least 20% lets you avoid mortgage insurance.

To explain how bankers and real estate agents talk about down payments, let's say you buy a house for $100,000:

  • A 3% down payment means that you pay the seller $3,000 and you borrow $97,000. RATE SEARCH: Find a low down-payment mortgage today.
  • With a 20% down payment, you would pay the seller $20,000 and you would borrow $80,000.

Sometimes you'll hear a phrase like, "Alex put 20% down on the house." That means that Alex made a 20% down payment.

The money for a down payment can come from:

  • Your own savings.
  • The money you get when you sell a house.
  • Gifts and grants from family, employers and nonprofits.

Why down payments are required

When you make a down payment, you risk losing that money if you can't make the house payments and end up in foreclosure. This gives you an incentive to make your mortgage payments. That's why the lender requires a down payment.

Minimum down payments

Most mortgage lenders require a down payment of at least 3%. FHA loans (mortgages insured by the Federal Housing Administration) require a down payment of at least 3.5%. Depending on your credit history, the type of dwelling and your reason for buying, the minimum down payment could be 5%, 10%, 20% or more.

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A few limited mortgage programs require no down payment or a very small one.

Down payment and mortgage insurance

When you make a down payment of less than 20%, you must buy mortgage insurance. There are 2 main types:

  • Private mortgage insurance, often called PMI, is paid to an insurance company. Most PMI premiums are paid monthly. They're called annual premiums, even though they're paid every month. Most insurers offer the option of an "upfront premium" -- a big payment at the beginning of the loan.
  • FHA insurance is paid to the federal government. When you get an FHA-insured mortgage, you pay for an upfront premium plus monthly premium payments.

Fees for small down payments

In many cases, lenders charge fees to borrowers who make down payments of less than 20%. Those fees are on top of mortgage insurance premiums. The smaller the down payment, the higher the fees, which are paid at closing. Sometimes the lender charges a higher interest rate in lieu of the fees.

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Bigger down payment = more house

Finley and Kerry each can afford to spend about $925 a month on a house payment, excluding taxes and homeowners insurance. Kerry has $15,000 more saved for a down payment and can afford to spend about $32,000 more for a house.

Smaller vs. larger down payment

HomebuyerHouse priceDown payment amountPercent downMonthly principal and interestMonthly PMITotal monthly payment
Homebuyer: FinleyHouse price: $167,667Down payment amount: $5,000Percent down: 3Monthly principal and interest: $776.60Monthly PMI: $149.11Total monthly payment: $925.71
Homebuyer: KerryHouse price: $200,000Down payment amount: $20,000Percent down: 10Monthly principal and interest: $859.35Monthly PMI: $66Total monthly payment: $925.35

Assuming a 4% interest rate.
Source: Bankrate.com, Radian mortgage insurance calculator

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