What Is a Down Payment?
The down payment on a home loan is the amount of cash that you are required to put down when obtaining a mortgage. It is a way for you to show that you have the means necessary to purchase a home and that you are willing to use your savings to put towards your debt obligation. It is a common assumption that you need to put a 20% down payment on a home, and the rest of the home’s price would be borrowed from the lender. However, current loan products often allow you to put down as little as a 5% or less, and even in some cases, you are not required to put any money down. In this circumstance, the lender loans 100% of the purchase price of the home.
Here’s an example: To purchase a property at the price of $100,000, and you wanted a loan for $80,000, the down payment would be $20,000 or 20% of the purchase price of the home. Thus the “loan to value” (LTV) would be 80%. Keep in mind- this calculation does not include other fees or closing costs associated with completing the transaction. In addition, the more money you put down, the less interest you will pay over the life of the loan.