Take note of advertisements for mortgages and you will overhear the whole thing under the sun about terms. So, what precisely is a down payment for a house?

What Is A Down Payment For A House

Seeing today’s market prices for homes and how they have extremely increased, mortgages have turned into a requirement when buying a home. With home prices well over half a million for standard homes in many areas, almost nobody can afford to buy a home out of pocket. For that reason, almost every prospective homeowner looks to lenders to receive home loans or mortgages. These mortgages work with the lender basically buying the home for you and owning the home until you slowly buy it from the bank with monthly payments. The percentage you own is based on how much the value of the home rises after you buy the home and how much of the loan you have paid off.

 The primary way to consider your stake in the home, and also to receive a better mortgage deal, is to offer a down payment on the home. Down payments are cash that you put towards the cost of the home, in other words, it reduces the amount the lender places towards the home. Down payments work for you in two ways.

Firstly, they increase the aggregate money of the home you owe from day one to wit, the amount of equity you have in the home.

Secondly, they also show the lender you have some money put away and they will be willing to offer you better rates considering how much you can put down. In general, the worst rates are for no down payment loans and you can receive the best rates, as much as 2 to 3 percent less in interest, by putting around 20 percent of the home’s value as a down payment. If you have poor credit, you can get nervous lenders to issue a loan if you put down 25 percent of the sales price.

Down payments are an integral part of achieving the best mortgage possible. If you don’t have any cash put away towards the home, you are risking paying tens of thousands of dollars, if not more, in additional interest compared to what you would be paying had you set aside some money to put towards the home.  All and all, it just makes sense to maximize your down payment as much as possible when purchasing a home.

Also, check out 10 “No Money Down” Ways to Buy Real Estate.