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What is a Down Payment?

When buying a home, you will generally need a down payment. Learn what a down payment is and how much money you should put down for a house.

Before you can submit a down payment, you need to know what is a down payment? A down payment is a loan term that refers to the initial payment on a large loan. Large loans are often used to purchase large, expensive items like a home or a car. This allows purchasers to make installment payments rather than having to pay for their house or car all at once. When looking to buy a home or buy a car, you may need learn what is a down payment and save up so you can make an initial deposit on the mortgage loan or car loan. 

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Down Payment Definition

What is a down payment and when might you need one? You’ll need a down payment when entering into a large loan that requires down payments. Buying a house is one of the most common financial situations when you would need to save for a down payment. But there are other types of loans that require down payments, like car loans, boat loans, etc. 

Now that you know what is a down payment, why do some lenders require down payments, and some don’t? A down payment lets lenders know you are invested in this purchase. So, when you are submitting a large down payment to buy something like a house, it shows the mortgage loan lenders and the home sellers that you are serious about this purchase. 

Down Payment Definition

Down Payment vs Closing Costs

Now that you know what is a down payment, you might be confused by closing costs. Closing costs and down payments are not the same thing. They are both initial costs involved in buying things like a home, but they are not the same initial cost. 

Closing costs are fees, taxes, and administrative expenses that all help process a purchase. The down payment is a separate expense that includes your “offer to purchase” and shows the seller and lender that you are serious about this purchase and ready to begin the loan agreement. 

How Much Down Payment for a House?

It's not enough to know what is a down payment, you also need to know how much down payment is required to buy a house. How much you need for a house down payment will depend on a few factors like the price of the home. Usually, you want to at least pay 20% of the home’s price.

For example, if the cost of the home is $400,000, then you’ll want a down payment of at least $80,000 or more. 

Home Price x 0.20 = Down Payment Amount for a House

$400,000 x 0.20 = $80,000

If you pay less than 20% of the home price as a down payment, then you’ll need to pay for Private Mortgage Insurance (PMI). PMIs are often required for FHA loans (FHA loans are mortgage loans that are backed by US Federal Housing Administration mortgage insurance). This is because FHA loans only require as little as 3.5% as a down payment on a home. 

Down Payment for a House

How Much Down Payment for a Car?

When buying a car you should know what is a down payment and how much down payment is required to buy a car. How much you need for a car down payment will depend on a few factors like the price of the car. Usually, for a new car you want to at least pay 20% of the car’s price. For a used car, you want to at least pay 10% of the car’s price. 

For example, if the cost of a new car averages at about $60,000, then the average new car down payment needs to be at least $12,000. If the cost of a used car averages at about $30,000, then the average used car down payment needs to be at least $3,000. 

New Car Price x 0.20 = Down Payment Amount for a New Car

$60,000 x 0.20 = $12,000

Used Car Price x 0.10 = Down Payment Amount for a Used Car

$30,000 x 0.10 = $3,000

Car down payments often have more flexibility than mortgage down payments do. Many car dealerships will do promotions where customers can buy a car without putting any money down. 

New Car Down Payment
Used Car Down Payment

How to Save for a Down Payment

Once you know the answer to what is a down payment and how they work, you can start saving up. Savings for a large down payment is hard. It can take a lot of time so it’s important to start sooner rather than later.

Make Monthly Savings Account Payments

Start by making monthly payments into your savings account. Any extra money you have at the end of each month could go into a savings account. It can also help to have an estimate of how much you need to save and when you want to have it all saved by. That way you can plan your monthly payments accordingly. 

Earn More Money 

Another great way to save money for a down payment is to earn more money. Increase your income by finding a new job that pays better or starting a side hustle of some kind to earn extra money. You could also earn more money by having a yard sale. 

Spend Less Money

Spend less money so you have more money to deposit into your savings account. You might be surprised how much less money you can spend each month. Make a detailed budget to help you or use a prepaid card to keep your spending under control. 

Spend less money to save up for a downpayment

In Conclusion,

If a loan program requires a down payment, then it’s important to know what is a down payment and how much you need to put down. This will help you know how much you need to save up so you can get the car or the house you need.