A down payment is the money you give the seller or lender upfront when you buy a home, separate from the loan you borrow

When you buy a house, you do not borrow the entire purchase price. You pay part of it yourself — that is your down payment — and borrow the rest through a mortgage. If a house costs $300,000 and you make a $60,000 down payment, you borrow $240,000. The down payment comes from your own savings, not from the lender.

The down payment is expressed as a percentage of the home's price. A $60,000 down payment on a $300,000 house is 20 percent. Down payments typically range from 3 percent to 20 percent, though some programs allow lower and some buyers put down more.

Your down payment amount affects how much you borrow, how much interest you pay over the life of the loan, whether you have to pay mortgage insurance, and sometimes the interest rate itself. It is one of the largest financial decisions in the home-buying process.

Key Takeaways

  • Your down payment is the cash you provide at purchase; the rest of the price is borrowed through your mortgage.
  • Down payments range from 3 to 20 percent of the home price, depending on the loan type and your lender's requirements.
  • A larger down payment lowers your monthly mortgage payment, reduces total interest paid, and may eliminate the need for mortgage insurance.
  • A smaller down payment lets you buy sooner with less cash on hand, but costs more in interest and may require you to pay an extra insurance premium.
  • The down payment is due at closing, the final step when you sign documents and receive the keys.

How down payment size changes your monthly payment and total cost

The larger your down payment, the smaller the loan amount, and the smaller your monthly mortgage payment. On a $300,000 house at a 7 percent interest rate over 30 years, a 20 percent down payment ($60,000) results in a monthly payment around $1,330. A 5 percent down payment ($15,000) results in a monthly payment around $1,596. The difference is roughly $266 per month, or $95,760 over 30 years.

That difference compounds when you include interest. With a smaller down payment, you borrow more, so you pay interest on a larger balance for 30 years. Over the life of the loan, a 5 percent down payment costs significantly more in total interest than a 20 percent down payment, even though your monthly payment is only moderately higher.

However, a smaller down payment means you need less cash upfront. If you have $20,000 saved and a house costs $300,000, a 5 percent down payment ($15,000) lets you buy now. A 20 percent down payment would require you to save another $45,000 first. The trade-off is between buying sooner with less cash or waiting to save more and paying less interest later.

Mortgage insurance and why it matters when your down payment is small

If your down payment is less than 20 percent, most lenders require you to pay mortgage insurance, also called PMI (private mortgage insurance). This is an insurance policy that protects the lender if you stop paying the mortgage. You pay the premium as part of your monthly mortgage payment.

Mortgage insurance is not optional — it is a requirement of the loan. The cost varies by lender and loan type, but typically ranges from 0.5 to 1.5 percent of the loan amount per year. On a $240,000 loan, that could be $1,200 to $3,600 per year, or $100 to $300 per month added to your payment.

You can remove mortgage insurance once you have paid down the loan to 80 percent of the home's original value, or in some cases when the home has appreciated enough. This usually takes several years of payments. A 20 percent down payment avoids mortgage insurance entirely from day one, which is one reason it is often cited as a target.

Down payment sources and what lenders accept

Your down payment must come from your own funds. Lenders verify the source of the money to prevent fraud and to confirm you have genuine savings. Acceptable sources include your personal savings account, money from the sale of a previous home, a gift from a family member, or funds from a retirement account (though this has tax consequences).

A gift from a family member is allowed, but the lender will require a signed gift letter stating that the money is a gift and does not need to be repaid. The letter must come from the person giving the money and must include their relationship to you, the amount, and confirmation that it is a gift.

Borrowed money does not count as a down payment. If you take out a personal loan or credit card advance to fund your down payment, the lender will see that debt on your credit report and may deny your mortgage application or require a larger down payment to offset the added risk.

Down payment assistance programs and special loan types

Some buyers use programs designed to help with down payments. First-time homebuyer programs, offered by state and local housing agencies, sometimes provide grants or forgivable loans that reduce the amount you need to save. These vary widely by location and have different income limits and property type restrictions.

Certain mortgage types also allow lower down payments. FHA loans, backed by the Federal Housing Administration, allow down payments as low as 3.5 percent. VA loans, for military members and veterans, often allow zero down payment. USDA loans, for rural properties, also allow zero down. Conventional loans typically require at least 3 to 5 percent down.

The trade-off with these programs is that lower down payments mean higher monthly payments, mortgage insurance premiums, or both. A zero-down loan is not free — you pay for the lower upfront cost through higher monthly payments and insurance over time.

When and how you pay your down payment

You pay your down payment at closing, the final meeting where you sign the mortgage documents and officially become the owner. Closing typically happens 30 to 45 days after your offer is accepted, though it can be sooner or later depending on the purchase agreement and lender timeline.

Before closing, you will receive a Closing Disclosure, a document that lists all the costs and payments due at closing, including your down payment. You will also receive a title report and homeowners insurance quote. Review these documents carefully to confirm the down payment amount matches what you agreed to.

At closing, you bring a cashier's check or arrange a wire transfer for your down payment and closing costs combined. The lender will confirm receipt of the funds before releasing the mortgage money to the seller. Once all documents are signed and funds are transferred, you receive the keys and the house is yours.

Down payment and your interest rate

Some lenders offer a lower interest rate if you make a larger down payment. The logic is that a larger down payment means less risk for the lender — you have more of your own money at stake, so you are less likely to walk away from the loan. The rate difference is usually small, often 0.25 to 0.5 percent, but it compounds over 30 years.

A lower interest rate on top of a lower loan amount means your monthly payment drops significantly. However, not all lenders offer rate discounts for larger down payments, and the discount varies. When comparing loan offers, ask each lender whether they offer a rate reduction for a higher down payment and by how much.

Frequently Asked Questions

Can I use a 401(k) or IRA to fund my down payment?

Yes, but it has tax consequences. A first-time homebuyer can withdraw up to $10,000 from a traditional IRA without the early withdrawal penalty, though you will owe income tax on the amount. A 401(k) withdrawal is more complex and may trigger additional taxes and penalties. Consult a tax professional before withdrawing retirement funds.

What happens if I cannot save a 20 percent down payment?

You can buy with a smaller down payment — 3 to 5 percent is common — but you will pay mortgage insurance and a higher monthly payment. FHA, VA, and USDA loans allow even lower down payments. The trade-off is higher total cost over time, but you can buy sooner with less cash saved.

Is a larger down payment always better?

Not always. A larger down payment lowers your monthly payment and total interest, but it ties up cash you might need for emergencies, home repairs, or other investments. If you have a stable income and emergency savings separate from your down payment, a larger down payment makes sense. If your savings would be depleted, a smaller down payment may be safer.

Can the seller help pay my down payment?

In some cases, yes. A seller concession allows the seller to contribute toward your closing costs or down payment as part of the purchase agreement. However, there are limits — the amount is capped at a percentage of the purchase price, and it counts as a gift for tax purposes. Your lender must approve any seller concession.

Does my down payment affect my credit score?

Not directly. Your down payment does not appear on your credit report. However, how you fund it might — if you take out a loan or use a credit card, that debt shows up and can lower your score. Paying with savings has no credit impact.