Down Payment Explained
The down payment is the single input that sets everything else in motion: the loan amount, the monthly payment, the total interest, and whether mortgage insurance applies. This guide compares three down payment sizes on the same illustrative purchase and looks at where the money comes from. Test your own figures in the free mortgage calculator.
In short: the down payment sets the loan amount, and the loan amount sets the payment and the total interest. Twenty percent also clears the threshold that governs private mortgage insurance on a conventional loan.
What a down payment does
The down payment is the part of the purchase price paid in cash rather than borrowed. Everything downstream follows from it mechanically: the loan amount is the price minus the down payment, the monthly principal and interest come from that loan amount, and the total interest is whatever that schedule accumulates over the term.
The relationship is linear on the loan side. At an illustrative 6.5% over 30 years, every $1,000 borrowed adds $6.32 to the monthly payment and $1,275.44 of interest across the full term. That single figure explains most of what a down payment decision is worth.
Three down payments compared
The example below uses an illustrative $350,000 purchase price at 6.5% over 30 years. Only the down payment changes.
| Down payment | Cash down | Loan amount | LTV | Monthly P&I | Total interest |
|---|---|---|---|---|---|
| 5% down | $17,500 | $332,500 | 95% | $2,101.63 | $424,085.42 |
| 10% down | $35,000 | $315,000 | 90% | $1,991.01 | $401,765.14 |
| 20% down | $70,000 | $280,000 | 80% | $1,769.79 | $357,124.57 |
Moving from 5% to 20% down means $52,500 more cash at closing. In exchange the payment drops by $331.84 a month and total interest falls by $66,960.86 over 30 years. The middle step is proportional: 5% to 10% is $110.61 a month and $22,320.29 of interest, and 10% to 20% is $221.22 a month and $44,640.57.
Those interest figures assume the loan runs the full 30 years. Selling or refinancing earlier truncates the saving, since interest that is never charged is never saved. The payment difference, by contrast, applies from the first month.
The 20% threshold
Twenty percent down produces an 80% loan-to-value ratio, which is the line conventional lenders use for private mortgage insurance. Below it, PMI is generally required; at or above it, it generally is not. PMI can also be removed later as the balance falls and equity builds, so starting under 20% is a temporary condition rather than a permanent one on most loans. The PMI page covers the cost and the cancellation rules in full.
The threshold is worth naming because it is the one place where the relationship between down payment and cost stops being smooth. Everywhere else, a dollar more down is a dollar less borrowed. At 80% loan-to-value a whole monthly line item appears or disappears.
Putting less down
Smaller down payments trade cash for cost. The payment is higher, the total interest is higher, mortgage insurance usually applies, and equity starts thinner, which matters if the property has to be sold soon after purchase and selling costs come out of it.
They also make some purchases possible that otherwise would not be. Buying earlier means paying a known housing cost rather than an unknown future one, and it starts principal repayment sooner. Loan programs exist specifically for lower down payments, each with its own insurance structure and eligibility rules. The trade is real in both directions, and the size of it is exactly what the table above measures.
Where down payments come from
- Savings. The straightforward source, and the one that needs the least documentation, though lenders still trace large recent deposits.
- Gifts. Family gifts are widely permitted, with conditions. Lenders typically require a gift letter stating the money is not a loan, plus documentation of the transfer. Program rules on who may give and how much vary.
- Sale proceeds. Equity released by selling a previous home, net of the payoff and selling costs.
- Retirement accounts. Some plans allow loans or withdrawals for a home purchase. Tax and penalty consequences differ by plan and by circumstance, which makes this a question for a tax professional rather than a rule of thumb.
- Assistance programs. State and local down payment assistance exists in many areas, generally with income limits and occupancy requirements attached.
Whatever the source, lenders verify it. Unsourced deposits are one of the more common causes of late underwriting conditions, so keeping a clear paper trail for anything that arrives in the months before application saves time later.
Why bigger is not automatically better
A larger down payment converts liquid savings into home equity, which is not liquid. Reaching it requires selling something, borrowing against it, or refinancing, none of which are instant and none of which are free. Cash that is gone into a down payment is unavailable for the repairs, income gaps, and moving costs that cluster around a home purchase.
There is also an opportunity cost that runs in both directions. Money not put down can be invested, held as a reserve, or used to clear higher-rate debt, and the mortgage rate is the benchmark that comparison runs against. None of that resolves into a universal answer, because it depends on the rate, the alternatives available, and how much reserve a given household needs to sleep at night. What the numbers can settle is the price of each choice, which is what the table above does. How the resulting payment fits a budget is covered on the affordability page.
Compare your own: the mortgage calculator takes a price and a down payment together, so changing only the down payment shows the payment, the mortgage insurance line, and the total interest move in real time.
Frequently asked questions
How much does a bigger down payment lower the monthly payment?
At an illustrative 6.5% over 30 years, every $1,000 less borrowed lowers the monthly payment by $6.32 and removes $1,275.44 of interest across the full term. On the $350,000 example, moving from 5% down to 20% down lowers the payment by $331.84 a month.
Do you need 20% down to buy a home?
No. Loans exist with much smaller down payments. Twenty percent matters because it produces an 80% loan-to-value ratio, which is the threshold conventional lenders use for private mortgage insurance, and because it lowers the amount borrowed.
How much interest does a larger down payment save?
On the illustrative $350,000 purchase at 6.5% over 30 years, 20% down instead of 5% down saves $66,960.86 in interest and requires $52,500 more cash at closing. Those interest figures assume the loan runs the full term.
Can a down payment come from a gift?
Gifts are widely permitted with conditions. Lenders typically require a gift letter stating the money is not a loan, along with documentation of the transfer, and program rules limit who may give and how much.
More mortgage guides
- How much is PMI, and how do I remove it?
- How much house can I afford?
- Closing costs explained
- Discount points and the break-even math
- Mortgage terms glossary
This guide is general information, not financial advice. Rates and figures vary. Confirm all numbers with your lender.
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