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Key takeaways

  • The down payment is the initial cash payment the buyer makes during a real estate transaction and represents a percentage of the total purchase price of the home.
  • Down payments can range between 3 percent and 20 percent of the purchase price, depending on the loan type. Some loan programs don't require a down payment at all.
  • Making a larger down payment upfront reduces your monthly mortgage payments and saves you money on interest in the long run.

Most homebuyers have to pay a portion of the property’s purchase price upfront. This amount is called a down payment. Exactly how much you’ll need to put down depends on several factors beyond just the price of the home. Here’s what to know.

What is a down payment on a house?

A down payment is the initial cash payment the buyer makes during a real estate transaction. The down payment represents a percentage of the total purchase price of the home — not the full cost. If you’re required to make a down payment, you might choose to put down between 3 percent and 20 percent of the home’s total purchase price, depending on your savings and what type of loan you qualify for.

If you buy a home for $350,000, for example, a 10 percent down payment would be $35,000. You’d then secure a mortgage from a financial institution for the remaining balance of $315,000 that you’ll pay back in increments over the life of the loan.

Mortgage lenders often refer to the percentage of the purchase price that they finance as the loan-to-value ratio, or LTV. Using the above example, here’s how that looks:

  • When you put $10,500 down (3 percent) on a $350,000 home, your LTV ratio is 97 percent.
  • When you put $70,000 down (20 percent) on a $350,000 home, your LTV ratio is 80 percent.

As the homebuyer, your down payment goes into an escrow account, often managed by a real estate attorney or settlement officer. This third party holds onto the funds and distributes them to the seller once the deal is finalized. The seller ultimately receives the down payment.

Tips to save for a down payment

If you’ve been thinking of buying a house, you’re probably aware that you need to save a substantial amount of money for the down payment. Here are some tips for saving for a down payment:

  • Budget: Budgeting is essential for directing money toward your savings goals. Take a look at your monthly income and identify areas where you can reduce spending or temporarily halt spending while you’re saving. Take advantage of any extra money by funneling it into your savings account.
  • Don’t wait for a windfall: The key to saving for a down payment is to get started as soon as possible, even if you aren’t yet sure when you plan to buy a home.
  • Be strategic about where you put your savings: It’s a good idea to keep your money somewhere that provides a return, like a high-yield savings account or a certificate of deposit.
  • Take advantage of assistance programs: Look into your options for mortgage down payment assistance, such as applying for grants, low-interest loans or deferred-payment loans.

How to choose the best down payment amount

Putting a large down payment comes with plenty of perks, but it’s not necessarily the best decision for every homebuyer. Consider these pros and cons:

Pros of a bigger down payment

  • Smaller monthly payments: Making a bigger down payment upfront translates to smaller mortgage payments each month. Consider the difference between 3 percent down and 20 percent down on a $400,000 home. With a 30-year loan at a fixed 6 percent interest rate, Bankrate’s down payment calculator shows that the bigger down payment translates to a monthly mortgage payment savings of around $400.
  • Lower lifetime interest charges: Those smaller monthly payments add up to significant savings in the long run. In that $400,000 home example, a 20 percent down payment would save more than $78,000 over the course of a 30-year mortgage.
  • Potentially better terms: Lenders like to see larger down payments. By putting more of your own money into the transaction, you’re borrowing less of theirs, which can put you in the running for the lowest rates possible.
  • Ability to skip PMI: If your down payment is 20 percent on a conventional loan, you won’t have to deal with the additional monthly fee of mortgage insurance.

Cons of a bigger down payment

  • Potential to stretch your savings too thin: If you’re draining nearly all your savings to make a bigger down payment, you’re putting yourself in a precarious position as a new homeowner when an emergency cost or home repair inevitably pops up.
  • The need for more time to save: You might be tempted to keep saving up money to make a bigger down payment, but that strategy can backfire. While you’re trying to cut every expense, home prices might still be rising at a pace you can’t keep up with.

Down payment example

A bigger down payment can make it easier for you to get approved for a mortgage and allow you to buy more house for the same monthly payment, or even less. You might also get a lower rate and lower mortgage insurance premiums (if any). Here’s a breakdown of a 30-year fixed-rate mortgage at a 6.5 percent interest rate for a $375,000 home, using data from Bankrate’s mortgage calculator and mortgage insurance estimates from Freddie Mac’s PMI calculator:

Home price Down payment Monthly principal and interest Monthly PMI Total monthly payment
$375,000 $11,250 (5%) $2,299 $342 $2,641
$375,000 $37,500 (10%) $2,133 $219 $2,352
$375,000 $56,250 (15%) $2,014 $89 $2,103
$375,000 $75,000 (20%) $1,896 $0 $1,896

Note this example doesn’t account for the interest rate savings you’d likely see if you were to make a larger down payment. With 20 percent down, for example, you might pay a lower rate compared to the rate you’d get with 10 percent down.

Keep this in mind, as well: There is a trade-off between your down payment and credit rating. Bigger down payments can offset (to some extent) a lower credit score; higher credit scores can offset (to some extent) a lower down payment. It’s a balancing act.

For many first-time buyers, the down payment is the biggest obstacle to homeownership. That’s why they often turn to loans with smaller minimum down payments. These loans, though, require borrowers to purchase some form of mortgage insurance.

However, mortgage insurance is not necessarily a bad thing if it gets you into a home and starts you on the road to building equity. Consider this: If you were to save $250 a month, it would take you 25 years to accumulate the $75,000 needed for a 20 percent down payment on a $375,000 home. That’s a long time to keep renting just to save up the money. Plus, by the time that 25-year period is up, that $375,000 house is going to cost a lot more.

FAQ about down payments

  • For conventional loans, the minimum down payment is 3 percent. FHA loans have a minimum down payment of 3.5 percent with a credit score of 580 or higher. For scores between 500 and 579, the minimum is 10 percent. VA loans and USDA loans do not require any down payment, but they are reserved for members of the military and veterans or buyers in rural areas, respectively.
  • Mortgage lenders require a down payment as a hedge against risk. Additionally, if the lender has to foreclose and sell the property, it’s not on the hook for the entire purchase price, which can limit its potential losses if the home is sold for less than the remaining mortgage balance.
  • A down payment benefits the homebuyer in a variety of ways. Making a larger down payment upfront reduces your monthly mortgage payments and saves you money on interest in the long run. By providing a larger down payment, you’ll have more equity in your property and borrow less money.

    Furthermore, putting down at least 20 percent on a conventional loan means you’ll avoid paying for private mortgage insurance. In a competitive housing market, a substantial down payment can also make your offer more attractive to sellers.