The Ins and Outs of Down Payments for Homes and Cars

“`html

How Do Down Payments Work?

A down payment is the initial amount you pay when financing a purchase with borrowed funds. This amount is typically expressed as a percentage of the purchase price and is paid upfront. Lenders view down payments as a sign of good faith, indicating that the borrower is committed to the purchase and less likely to default on payments.

When you apply for a loan for a home, car, or other significant purchase, the loan offer will specify the required down payment, interest rate, and any applicable fees. Your credit history also plays a role; borrowers with lower credit scores may need to make higher down payments compared to those with excellent credit.

Different types of loans have varying down payment requirements, which can also differ among lenders. For instance, a mortgage on a $400,000 house with a 10% down payment would require $40,000 upfront, resulting in financing 90% of the purchase price, or $360,000.

Down payments are often negotiable. A lender might accept a lower down payment in exchange for a higher interest rate, or you could negotiate lower interest rates or fees by making a larger down payment.

Mortgage lenders usually require down payments to be made via certified check. Auto loan financers may accept certified checks, electronic transfers, debit card payments, or personal checks. Retailers offering financing on large goods may accept down payments by cash, check, or credit card.

What Is a Typical Down Payment on a House?

Mortgage lenders have considerable flexibility in setting down payment requirements, eligibility criteria, interest rates, and fees. However, some general practices are nearly universal among U.S. home lenders:

For mortgages with down payments of less than 20%, nearly all lenders require borrowers to purchase private mortgage insurance (PMI). This is because loans exceeding 80% of a home’s purchase price are considered risky. PMI protects lenders from losses if a borrower defaults and the property must be resold. PMI premiums increase monthly mortgage payments but can be removed once 20% of the principal is paid off. Making a 20% down payment can minimize PMI costs.

First-time homebuyers with FICO® Scores of 580 or higher can make down payments as low as 3.5% on FHA loans, which are backed by the Federal Housing Administration. Borrowers with FICO® Scores as low as 500 can also qualify for FHA loans but must make down payments of at least 10% of the home purchase price.

Qualifying veterans, service members, and surviving spouses can purchase homes with zero down payment and no PMI requirements through VA loans backed by the U.S. Department of Veterans Affairs.

What Is a Typical Down Payment on a Car?

Down payments of 10% are common when financing used vehicles, while down payments of 20% or more may be required for new vehicles, especially if your credit scores are less than stellar.

Even if a lower down payment is available, putting down more than 10% of a car’s value is often wise. This can provide some protection against the inevitable depreciation—loss of resale value—that all but collectible vehicles experience. Cars lose value each year based on mileage, condition, and local market preferences.

Benefits of a Larger Down Payment

Making a larger down payment has several potential advantages:

• Borrowing less: The more money you put down, the less you need to borrow. This means less debt and lower overall borrowing costs, such as interest rates and fees, which are typically calculated as percentages of the loan amount.
• Lower interest rate: A higher down payment often allows you to negotiate a lower interest rate, saving you money over the life of the loan.
• Lower monthly payment: Borrowing less money results in lower monthly payments, making it easier to fit the loan payment into your budget.

Benefits of a Smaller Down Payment

There are also advantages to making a smaller down payment:

• Ability to make a purchase sooner: Saving money takes time, and depending on your income and eagerness to buy a home, it may make sense to make a lower down payment and accept the related cost increases. This is particularly relevant as interest rates and housing costs rise.
• Keeping more cash on hand: Even if you have enough funds for a large down payment, it may be wise to put down less if you plan to make major improvements on the property or expect to need a large sum of cash for another purpose in the near future. Using all your available money for a down payment could save on interest but might require borrowing in the future if you need cash.

Down Payment FAQs

• Why Do Lenders Require a Down Payment?
• Does Your Down Payment Affect Your Interest Rate?
• Does Your Down Payment Affect Your Monthly Payments?
• What Are Down Payment Assistance Programs?

The Bottom Line

The size of your down payment, your credit scores, and the purchase price of the home, car, or loan you’re financing all interact to determine how much you’ll pay over the life of a loan. While saving up for a down payment, it’s wise to work on improving your credit score as well. By checking your FICO® Score from Experian for free and taking steps to enhance your credit, you can position yourself favorably when applying for a loan.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate the complexities of down payments and secure the best loan terms for your needs.

“`