What is Down Payment for Mortgage?

Howdy Wall St. Willy! My friend went to get a mortgage to buy a house but the bank that was lending the money to him asked for a down payment. So, what is a down payment anyway?

A down payment is money that you pay upfront when you take a loan.

For example, you usually pay 20% of the cost of the house you buy as a down payment when you take a mortgage or you could pay 10% of the cost of the car for auto loans.

Well, why do I have to pay some money upfront? Why can’t I just get all of the amount as a loan?

You making the down payment provides some safety to the bank that’s lending the money to you.

Because if you have paid some money, it means you are less likely to default on your payments to the bank, which means that the bank is more certain that you can and will repay the full amount of the loan.

However, there could be some loans that do not require a down payment, like zero down loans.

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Can I pay more money upfront as a down payment? For e.g., can I pay 30% as a down payment for a mortgage?

Of course, you can.

So how much should I pay as the down payment?

The lender defines the minimum down payment, but the higher the down payment the better.

Because with a higher down payment you might qualify for a lower interest rate and the more the down payment, the less the amount you borrow and pay interest on.

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So, with the higher down payment, you’d have a lower monthly payment and you also end up paying less money as interest over the life of the loan.

If you are taking the loan jointly with your spouse, can the down payment come from both people’s accounts?

Yes, the down payment can come from multiple accounts.

Thank you very much for telling me about down payment, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

Podcast: What is Down Payment for Mortgage?

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