Mortgage Dictionary -> Down Payment
a partial payment made at the time of purchase; the balance to be paid later
The down payment. It's what many people have to make not just when purchasing a new or used vehicle, but also when buying a house. Most people do not know all of the facts about down payments, which can make things a little bit more complicated than they need to be. Fortunately, we'll be covering the basic facts about the down payment, why it's necessary and how much it generally is.
What is the Down Payment?
The down payment is the payment the borrower makes right up front when they purchase the item. This down payment is a portion of the total cost for the item typically a vehicle or a house. It's generally only required when the item is pretty expensive, but may also be required in smaller loans as well. Practically all homes, even in the sagging real estate market, require down payments to be made to the lender. The down payment is usually in the form of a check or straight-up cash.
Why is the Down Payment Necessary?
Even in good economic times, there are some people who default on their loans. The down payment is essentially a piece of insurance for the lender so that, if the borrower defaults on the loan, the lender recoups their costs for the loan. In this case, the down payment is not returned to the borrower.
However, if the borrower does not default on the loan, the down payment goes toward the principal of the loan. It makes good financial sense for the lender to require a down payment, as it protects them in the worst case scenario.
How Much is It?
Down payments are generally based on a certain percentage of the loan. This percentage rate varies wildly from lender to lender, but is typically between 5 and 20% of the total amount of the loan. In the case of a loan that is valued at $100,000, a 5% down payment would be roughly $5,000. Some lenders may be fine with down payments that are far less than 3%, but most are not. The amount of the down payment can also be influenced by credit history, as those with good credit will usually be expected to put down less than those with bad credit.