What Is A Down Payment?
A down payment refers to the initial equity on a potential acquisition that is paid upfront.
It refers to the sum of money paid by a buyer before purchasing an expensive item or service.
The down payment is usually a percentage of the total cost price for the transaction, after which the buyer will obtain a loan to finance the remaining amount.
Higher down payments translate directly to a less amount needed to be borrowed, fewer monthly installments, fewer interest rates long-term, and sometimes, insurance becomes unnecessary.
It is sometimes referred to as a deposit.
Lenders may overlook down payments, in which case the tag ‘zero down payments’ is used. Depending on the borrower and the type of purchase, they may also require as high as 50% down payment.
To purchase homes, vehicles, or other assets, down payments are often made upfront. They usually come from the buyer’s savings, and, in some cases, checks, credit cards, and electronic payments come in handy.
The down payments are self-financed and done out-of-pocket before borrowing is done.
Down payments and credit scores are related in that larger down payments can compensate for a lower credit score. To some extent, and conversely, higher credit scores can make up for low down payments.
Some sources for financing down payments are savings, sale of assets (including stocks, collectibles, mutual funds, cryptocurrency), gifts from family and friends, down payment assistance (DPA) programs from non-profit organizations, government agencies, and employers.
Mortgage lenders require down payments because it builds confidence in the borrower and their willingness to commit to the project.
It is also evident that homeowners who have invested their own money are less likely to default on payments. In the event of a foreclosure, it helps the lender recoup some of the property’s sale funds, primarily if it is sold for less than the balance on loan.
Down Payment Example
If an individual wants to purchase a home valued at $100,000 and makes a down payment of $5,000, that is, 5%, a mortgage for $95,000 can be taken out.
If a down payment of $15,000 were made, $85,000 would be needed in mortgage value.« Back to Glossary Index