Down Payments

The vast majority of lenders will require that you put at least some kind of down payment on your home purchase along with your mortgage loan. The amount required can vary significantly depending on the lenders policies, your credit history, and in some circumstances even the property itself, but for most people tends to range between 5% and 30%.

The lender normally requires a down payment to cover their costs in the event the loan goes bad and they have to foreclose on the property. If the borrower had not put any cash down on the purchase, then the lender would (more often than not) lose money when trying to sell the property to recoup the original loan amount.

For example; if there was no down payment on a $200,000 mortgage, the 6% realtor fee they would be charged to sell the foreclosed home would result in a $12,000 loss to the lender – and that’s assuming they can sell the property at the same price the original borrow bought it for. If not, every penny under the original price represents additional loss. On top of the selling price there are carrying costs; every month the foreclosed property doesn’t sell costs more money.

In a nutshell, charging interest is how a lender makes money, while the down payment is a lenders way of insuring against loss in the event you default on the loan.

Naturally the answer to this lies largely in how much you can afford. If it’s possible, making a down payment of more than 20% of the purchase price means you won’t have to pay for PMI, which will save you some money. The more you put down the less you’re borrowing, which also saves you on interest. Of course, if we all had bags of money lying around we wouldn’t home loans in the first place, so the short answer is, put as much down as you’re comfortable paying, and don’t expect to pay any less than 5%, and probably more than 10% with most lenders.

If you can’t afford a down payment don’t give up - there are a number of housing programs that offer assistance to people having problems getting that initial lump sum together that could otherwise afford the monthly payments. Look under ‘assistance programs’ to the left for more information on federal, state and local housing initiatives.

If you can’t afford to put down a significant down payment, there are a number of mortgages these days that will allow you to pay down a percentage of the loan principle each year, a good way to lower your total interest paid when you can’t afford to put much down at the moment.

If you’d like to see how much your down payment will affect your monthly costs, try using our Online Mortgage Calculator for some quick numbers.