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What is a down payment?
A down payment is the money you pay up front when you buy a home. You’ll take out a mortgage to borrow the rest of the money to buy the house.
For example, you might want to buy a $200,000 house, and you have $20,000 saved for a down payment. You’ll take out a mortgage loan for the remaining $180,000.
The amount you’ll need for a down payment depends on which type of mortgage you get.
The down payment you’ll need for each type of mortgage
There are two basic types of mortgages: conventional and government.
A conventional mortgage is not backed by a government agency, while a government mortgage is secured by the government and the agency compensates your lender should you fail to make mortgage payments.
The minimum down payment depends on whether you choose a conventional or government loan, and which sub-category of loan you get.
There are two types of conventional mortgages:
- Conforming loan. This is a loan under a certain amount, which is just under $550,000 in most parts of the US in 2021. You’ll need at least a 10% down payment for most conforming loans, or just 3% if your mortgage is backed by federal-sponsored companies Fannie Mae or Freddie Mac.
- Nonconforming loan. Also known as a jumbo loan, this is a mortgage for a larger amount. It has stricter eligibility requirements, including the down payment. The amount you’ll need depends on the lender. Many require at least 20%, but some ask for less or more.
There are three types of government-backed mortgages:
- FHA loan. This loan has more lenient requirements than a conventional mortgage. You’ll need a 3.5% down payment if you have a credit score of 580 or higher, and a 10% down payment with a score between 500 and 579.
- VA loan. This mortgage is for military families. You don’t need any down payment for a VA loan.
- USDA loan. This loan for low-to-middle income buyers in rural and suburban areas doesn’t require any down payment.
Reasons to save for a larger down payment
If you have the minimum down payment required to buy a house, you might decide you’re ready to get the ball rolling. But you also may want to consider saving even more for a down payment. Here are some advantages of paying more up front:
- Lower interest rate. Lenders reward a higher down payment with a lower interest rate. This could save you tens of thousands of dollars over the years.
- Lower monthly payments. When you take out a 30-year mortgage, for example, the amount you borrow is spread out into monthly payments for 30 years. The less you borrow, the less money you’ll pay every month.
- Less or no mortgage insurance. If you put 20% down on a conventional mortgage, you won’t have to pay for private mortgage insurance, which typically costs between 0.2% and 2% of your mortgage amount. Other types of mortgages require different kind of insurance that cost a percentage of your loan, so the less you borrow, the less you’ll pay for insurance.
There are always pros to having a bigger down payment. But it’s up to you whether you’re ready to buy now or want to save more.
Use our free mortgage calculator to see how a smaller or larger down payment will affect your monthly payments.
Your estimated monthly payment
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 each month would reduce the loan length by 146 months
You’ll also see how the amount you put down will affect how much you spend over the entire life of your mortgage.