The rate of interest on a loan, expressed as a percentage.
When you’re considering buying a home, the amount of your Glossary_Term: down payment plays an important role. A down payment is a percentage of your home’s purchase price that you pay up front when you close your home loan. Lenders often look at this down payment amount as your investment in the home, so it plays an important role. Not only will it affect how much you’ll need to borrow, it can also influence:
So how much will you need? That depends on the purchase price of your home and your loan program. Different loan programs require different percentages, usually ranging from 5% to 20%.
The amount of your down payment helps give your lender the property’s Glossary_Term: loan-to-value ratio (or “LTV”). LTV is one of the main factors—along with Glossary_Term: debt-to-income ratio and Glossary_Term: credit score—that a lender considers when deciding whether or not to extend you Glossary_Term: credit.
Your loan-to-value ratio expresses how much you will owe on the home after your down payment. In other words, it’s a percentage that shows the ratio between your home’s unpaid Glossary_Term: principal and its Glossary_Term: appraised value. The higher your down payment, the lower your loan amount will be and the lower your loan-to-value ratio will be. Here’s the formula:
Loan Amount ÷ Appraisal Value or Purchase Price (whichever is less)
When you consider how much to put down on your home, think about your lender’s requirements and what a higher or a lower down payment will mean for you. Is it worth it to you to pay private mortgage insurance each month in order to receive the other benefits of homeownership? Or would it make more sense for you to save for a larger down payment and avoid PMI, even if that means waiting longer to buy a home? Knowing the impact of each choice can help you make your decision with confidence.
If you are having trouble saving for a down payment, you should know that certain lenders offer or participate in programs that could enable you to qualify for down payment assistance. Ask your lender whether you might qualify for one of these programs.