Almost all types of loans require borrowers to make a certain percentage as a down payment to get a mortgage. The higher the down payment, the lower the loan balance, loan term, and interest rates on the mortgage.
A down payment is a sum of money you pay your lender upfront before making the monthly mortgage payments when you buy a house. It reduces the risk of default for lenders because they can trust that the borrower has some money to spare upfront and isn’t as likely to default on their loan.
If you make a large down payment, ideally 20%, your loan balance is already reduced. This means you own more of your property from the beginning which gives you the advantage of negotiating for lower interest rates as well, further lowering your monthly payments. Another advantage of putting down 20% is that you can avoid the cost of a mortgage insurance payment. Lenders, especially with certain types of loans like the Federal Housing Administration (FHA) loan, require you to purchase mortgage insurance to protect lenders against default. You don’t need to pay this if you’ve put down 20%.
However, many borrowers are not able to afford a 20% down payment. If you are one of them, other lenders and types of loans require a minimal amount or even no down payment to get a mortgage. For example, the Department of Veterans Affairs (VA) loans which are only available to veterans and people in active military service, don’t need to make a down payment. But they need to cover the funding fee which could range between 1.25 to 3.3% of the mortgage amount. A U.S. Department of Agriculture (USDA) loan also does not need a down payment, but you can only purchase a house in eligible rural areas to qualify.
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