Down Payment
An upfront cash payment made at the time of purchase, representing the buyer's initial equity in a financed asset.
What is Down Payment?
A down payment is the portion of a purchase price paid in cash at the time of the transaction, with the remainder financed through a loan. In home purchases, the down payment reduces the loan amount and determines the loan-to-value (LTV) ratio. A 20% down payment on a conventional mortgage eliminates the requirement for private mortgage insurance (PMI) and typically results in better loan terms. FHA loans allow down payments as low as 3.5% for buyers with qualifying credit scores, while VA loans (for eligible veterans) may require no down payment at all. A larger down payment means lower monthly payments, less total interest paid, and immediate built-in equity.
Example
A buyer purchases a $500,000 home with a 10% down payment ($50,000), borrowing $450,000. Because the LTV ratio is 90% (above 80%), the lender requires PMI adding $337/month. If the buyer increased the down payment to 20% ($100,000), the loan would be $400,000, PMI would be eliminated, and the buyer would save $337/month — paying back the extra $50,000 investment in about 12 years.
Source: Consumer Financial Protection Bureau — Down Payments