What is a down payment?
A down payment is simply a percentage of the home’s purchase price. For example, a 10-percent downpayment on a $250,000 home would be $25,000. A down payment also can be expressed as a “loan-to-value ratio” or LTV. A 10-percent down payment would be equivalent to a “90-percent LTV.” The buyer’s down payment becomes the new homeowner’s initial “equity” in the home. (Equity is the value of the home minus what’s owed on the mortgage.) For example, if you borrowed $180,000 to buy a $200,000 home, you would have $20,000 of equity. If you borrowed $200,000 to buy that same home, you would start out with zero equity in the home. Zero money down can increase your loan costs No-down payment mortgages are riskier for the lender since the borrower doesn’t have any ownership stake in the home and could become “upside-down” if the value of the property dipped below the purchase price. That’s why high-LTV loans typically are more costly than loans that require a larger down payment. A down payment t
Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment. The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.
