Down Payments: What To Know Before Buying a Home

Home Buying

Nov 19

Down Payments on a home image Vision Retirement CFP RIA fiduciary financial advisor

When it comes to buying a home, the down payment is one of the biggest financial hurdles you’ll encounter as a major part of the homebuying process—impacting everything from your monthly mortgage payment to whether mortgage insurance is necessary. How much do you really need to put down, though, and what’s the smartest way to save?

Let’s break down what exactly a down payment is, how it works, and how to decide what’s right for your own unique situation.

What is a down payment?

A down payment is the upfront cash you contribute toward the purchase of a home, the remainder covered by your mortgage loan. If you buy a $400,000 home and you put 10% down, for example, that’s $40,000 out of pocket. Your mortgage will cover the remaining $360,000.

Your down payment is due at the closing and plays a big role in shaping your overall mortgage terms; the more you put down, the less you’ll pay in interest and the better your chance of qualifying for lower rates or avoiding extra costs (such as private mortgage insurance (PMI), often required if your down payment is under 20%).

Think of your down payment as a head start on building equity whereby you own a portion of the home outright from day one; this ownership stake can grow over time as property values rise and your mortgage balance decreases.

How much do you need for a down payment?

One of the most common homebuying myths is that you need a 20% down payment to qualify for a mortgage. While doing so can indeed help you avoid private mortgage insurance (PMI) and unlock better loan terms, it’s by no means a requirement—especially in the modern lending landscape.

In fact, many buyers—particularly first-timers—purchase homes with a much more modest down payment. Thanks to a variety of loan programs designed to make homeownership more accessible, you might qualify for a mortgage with as little as 3% down or even no down payment at all if you meet certain criteria. Here’s a general breakdown by loan type:

Down Payment Requirements by loan type chart Vision retirement financial planner CFP RIA Ridgeqwood NJ

While these low- or no-down-payment options can make it easier to enter the market, they do come with trade-offs. The smaller your down payment, the more money you’ll need to borrow. This means:

A larger loan balance
Higher monthly mortgage payments
More interest paid over time (possibly)
The added cost of PMI (in most cases)

That said, putting less money down doesn’t necessarily mean you’re making a bad financial decision—especially if you have good credit, a stable income, and a solid plan to manage your mortgage responsibly. Many buyers, likewise, swap a higher down payment for more money reserved for moving costs, emergency savings, or home upgrades: all of which can be just as important in the long run.

Why down payments matter

Down payments aren’t just about getting a loan; they also signal stability to lenders. Here’s why they matter on both sides of the transaction…

For lenders

A larger down payment means a buyer is less likely to default, lowering the lender’s risk and possibly resulting in better loan terms such as lower interest rates.

For buyers

You borrow less, leading to lower monthly payments.

You pay less interest over the life of the loan.
You build instant equity in your home.
You may be able to skip PMI with 20% or more down.
You’re less likely to go underwater (owing more than your home is worth).

How down payments work at closing

When you’re ready to close on your home, your down payment becomes part of your total “cash to close ”: the grand total of upfront costs you’ll need to bring to the table. It includes more than just the down payment itself, so expect to cover:

Your down payment
Closing costs (e.g., loan origination fees, title insurance, and appraisal costs)
Prepaid items (such as homeowners’ insurance and property taxes)

If you made an earnest money deposit earlier in the process (basically a “good faith” payment to show the seller you’re serious), don’t panic! That money didn’t vanish and is simply credited toward your down payment at closing, reducing the total amount you’re responsible for.

Once everything is finalized and funds are collected, the down payment is held in escrow by a neutral third party—typically a title company or real estate attorney—with the escrow agent then ensuring the money is properly disbursed to the seller as part of the home purchase.

It’s not the most glamorous part of buying a home, but it’s a critical one: the transfer of funds making the sale official and sealing the deal so you can get your keys and start unpacking.

Down payment example

To learn how a down payment affects your monthly mortgage, check out this simplified example using a 30-year fixed-rate loan with a 6.5% interest rate on a $375,000 home:

Down payment scenarios on a 375k home chart Vision retirement financial planning CFP RIA Ridgewood New jersey

Disclaimer: The figures above are illustrative estimates only. Actual mortgage payments, interest rates, and PMI costs will vary based on lender, credit score, loan terms, insurance requirements, taxes, and location. Always consult a mortgage professional for personalized estimates.

As you can see, even a modest increase in your down payment can lead to hundreds in monthly savings, and thousands in savings over the life of the loan.

Pros and cons of a larger down payment

A larger down payment can offer several financial advantages, but it's not always the best move for every buyer. Benefits and considerations to weigh when deciding how much to put down include…

Advantages of a bigger down payment

Lower monthly payments

Monthly mortgage payments are smaller when you borrow less money from the lender, possibility freeing up your budget for other expenses or allowing you to qualify for a more expensive home.

Less interest paid over time

A smaller loan amount doesn’t just reduce your monthly payments but also slashes the total interest you’ll pay over the life of the loan, potentially saving you tens of thousands of dollars.

Better loan terms

Lenders tend to offer more favorable rates and terms to borrowers capable of making a larger down payment. With more of your own money on the line, you’re seen as less risky—which can in turn trigger lower interest rates or waived fees.

No private mortgage insurance (PMI)

You can usually skip PMI altogether if you put down at least 20% on a conventional loan, potentially saving you hundreds of dollars a month depending on the size of your mortgage and your credit profile.

Considerations and trade-offs

Possibly draining your savings

Putting all your available cash toward a down payment can render you financially vulnerable, hindering your ability to maintain a necessary safety net for unexpected home repairs, medical bills, or other emergencies.

It may take longer to save

While saving for a 20% down payment might seem like the most responsible choice, waiting too long could cause you to miss out—especially if you find yourself unable to keep up with rising home prices or interest rates.

Other financial goals might take a backseat

By tying up a large chunk of money for your home, you may delay progress toward other important financial goals such as retirement savings, home improvements, or paying off high-interest debt.

How to choose the right down payment for you

There’s no perfect number when it comes to a down payment, the best amount depending on your own financial situation, risk tolerance, and long-term goals. Ask yourself:

Can I comfortably afford the monthly mortgage payment?
Will I still have savings left over for home maintenance or emergencies?
Is waiting to save a more realistic option, or will home prices rise faster than I can save?

You may find that a 10% down payment strikes a good balance, lowering your monthly costs while simultaneously keeping a bit of extra money in your pocket.

Smart ways to save for a down payment

If you’re not quite there yet, here are some practical tips to help you save:

Make a budget

Track your spending and identify areas where you can temporarily cut back.

Automate savings

Set up automatic transfers into a separate down payment savings account.

Use a high-yield account or CD

Earn interest on your savings while keeping your money safe.

Look into assistance programs

Many states and local governments offer grants or low-interest loans for first-time buyers

Start now

Even small, consistent savings add up over time. Don’t wait for a big windfall to save up!

Final thoughts: home down payments

Your down payment is more than just a lump sum; it sets the tone for your mortgage, monthly payments, and financial flexibility as a homeowner. Whether you’re putting down 3% or 20%, understanding your options can help you buy smarter—not just sooner.

Before making your move, talk with a lender about what you can afford, which loan programs you might qualify for, and what your ideal down payment strategy looks like.

Have questions about the home-buying process? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.