A down payment is the initial upfront cash payment made when purchasing a large asset like a home or vehicle. It reduces the loan amount and demonstrates financial commitment to the lender.
How Down Payments Work
The down payment is expressed as a percentage of the purchase price. For homes, conventional loans typically require 5-20%, while FHA loans allow as little as 3.5%. VA and USDA loans may require zero down payment for eligible buyers.
A larger down payment means a smaller loan, lower monthly payments, and less interest paid over the life of the loan. Putting down 20% or more also eliminates the requirement for private mortgage insurance (PMI).
Why Down Payment Size Matters
- Below 20%: PMI required (adds 0.5-1% of loan annually)
- At 20%: No PMI, better interest rates, stronger offer
- Above 20%: Even lower payments and interest, but consider opportunity cost
Real-World Example
On a $350,000 home: a 10% down payment ($35,000) means borrowing $315,000 with PMI of ~$131/mo. A 20% down payment ($70,000) means borrowing $280,000 with no PMI. The 20% option saves $131/mo in PMI plus reduces the loan payment by $221/mo — a total of $352/mo less.
Frequently Asked Questions
How much should I put down on a house?
20% is the traditional target because it eliminates PMI and gets the best rates. However, many buyers successfully purchase with 3.5-10% down. The right amount depends on your savings, monthly budget, and local market.
Can I buy a house with no down payment?
Yes, through VA loans (military) or USDA loans (rural areas). Some state programs also offer down payment assistance for first-time buyers.
Should I use all my savings for a down payment?
No. Keep an emergency fund of 3-6 months of expenses separate from your down payment. You will also need cash for closing costs (2-5% of loan), moving, and any immediate repairs.