QandAs: Loans

What is a Mortgage Down Payment?

Answer:
A Mortgage Down Payment is the process of paying

upfront for a portion of the purchase price of the home. The down payment is usually paid at closing and your mortgage loan will end up being the purchase price of the home minus your down payment. So if you are purchasing a $500,000 home and your down payment was $100,000 then your mortgage loan would total $400,000.

A down payment has some significance and it's a good idea to understand how a down payment can effect your mortgage.

Depending on your financial situation a down payment of any type may be impossible and in certain instances it can be more beneficial to skip the down payment all together. For example, if you are only able to put 3% down and this is limiting your day-to-day income just to lower your mortgage rate a couple bucks then it may be more beneficial for you to skip the down payment, get a mortgage for the full amount and once you have more income refinance.

There are quite a few fixed home loans in which 10% or more down payment will lower the mortgage interest rate. The amount of down payment in correlation with how much it lowers the interest rate depends on the market conditions. Because you are covering a portion of the homes purchase price with the down payment lenders see this as a loan with less risk therefore they will extend their thanks by lowering interest rates. It's a win - win in that you are able to lower the amount borrowed on your home and lower the interest rate at the same time. Often times, a down payment of 5-20% can be beneficial with regards to a conventional fixed mortgage loan.

So think of your down payment as an investment. You put down cash or pay cash at closing for a portion of the purchase price. In exchange, you are gaining equity which will go up with home prices and subtracting the amount of interest paid or debt from the mortgage loan at the same time.

If you are unsure how much or if you should put a down payment on your mortgage consider how much cash you have on hand and how much the down payment will lower your mortgage premium.