What Is A Down Payment And How Does It Work?

What Is A Down Payment And How Does It Work?

When you wish to acquire expensive things like a car, house or other assets, you’ll usually pay a minimum portion of the total price. It is your first payment that will affect your whole purchase. It is the very reason why it worth knowing what this fee is all about and how it works.

Defining Down Payment

Down payments are upfront fees one pays to acquire a significant purchase. The down payment you’ll be putting up can come from your savings and are usually paid via cash, checks, debit or credit cards and even electronic payments. If, for example, you’re applying for a loan, the down payment is a small portion of the total purchase price which will be coming from your pocket.

When it comes to mortgages and car loans, the amount you’ll be putting down can vary and will affect the terms and monthly fees of your loan. If you wish to pay a shorter term mortgage program without the need to pay for PMI, bring 20% down. If you’re short on funds, then you can go for as low as 3.5% down payment, or even check if you’re eligible for no down payment home loans.

The average down payment on a house in Texas will depend on the type of mortgage program you’ll be applying. Most home loans require you to put a small down payment except for VA loans and USDA Loans. For example, the minimum down payment for a Conventional 97% LTV Mortgage is 3%. For FHA loans, you will need to put down 3.5% down payment if your credit score is at least 580. If your FICO score is below 580, you’ll need to pay a higher down payment (10% of the purchase price).

Good Read: How to Get a Mortgage With No Down Payment

Pros and Cons Of Bringing A Smaller Down Payment

It is perfect for individuals who are looking for long term rates and wishes to acquire a home the soonest time possible by putting the lowest down payment possible. If you’re reserving your hard-earned cash for home improvement projects, emergency funds or other investments, you might this to be a better choice.

However, the downside is one will need to pay for Private Mortgage Insurance. When you spend less than 20% of the required down payment for mortgage loans, lenders will have you pay PMI on top of other fees. It can also lead to higher interest fees. The PMI will give your lenders protection in case one fails to pay off the mortgage.

Pros and Cons Of Bringing A Larger Down Payment

A bigger down payment means you’ll need to pull out more funds out of your bank account. However, the more you put down, the bigger your chances of getting lower rates and better deals. The reason is that lenders will assume you’re more capable of paying off your mortgage. You can dodge PMIs, have smaller monthly home loan fees and even acquire instant equity thanks to a bigger upfront payment. You can also easily qualify for other loans in the near future.