Down Payments
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When you buy a home, the down payment is the amount you pay up front, while the rest is borrowed as a mortgage. Common down payment percentages are 5%, 10%, and 20% of the home's purchase price. The amount you put down directly affects how much you need to borrow, which in turn shapes your monthly payment, interest paid over time, and even whether you need to pay for private mortgage insurance (PMI).
A lower down payment—such as 5%—means you borrow more, leading to a larger loan and higher long-term interest costs. A higher down payment—like 20%—reduces your loan size, lowers your monthly payment, and can help you avoid PMI. However, saving for a larger down payment can delay your purchase and tie up more of your cash in your home.
The loan-to-value (LTV) ratio is the percentage of the home's value that you finance with a mortgage. It is calculated by dividing the loan amount by the home's purchase price. Lenders use LTV to assess risk; a lower LTV generally means less risk for the lender.
To see how down payment size changes your LTV, consider a home priced at $400,000. If you put down 5% ($20,000), you borrow $380,000, so your LTV is 95%. With a 10% down payment ($40,000), the loan is $360,000, making the LTV 90%. If you put down 20% ($80,000), you borrow $320,000, and your LTV drops to 80%. As the LTV definition explains, a lower LTV can make your loan less risky to the lender and may help you get better terms.
Private mortgage insurance (PMI) is insurance that protects the lender if you default on your mortgage loan. Lenders generally require PMI when your down payment is less than 20% of the home's purchase price. The purpose of PMI is to reduce the lender's risk when financing a larger portion of the home's value. Once your loan-to-value (LTV) ratio drops to 80% or lower, you may be able to cancel PMI.
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