Down payment

Definition

A down payment is an upfront, initial payment made by a buyer as part of a larger transaction, typically for the purchase of a high-value item or property.

What is a down payment?

A down payment represents a percentage of the total cost and is paid at the outset of the transaction to secure the purchase.

Purpose of a down payment:

1. Risk reduction: For sellers, a down payment provides assurance that the buyer is committed to the purchase.
2. Equity building: For buyers, a down payment represents the initial equity in the purchased item or property.

The specific percentage required for a down payment varies depending on the nature of the purchase and the policies of the seller or lender. A larger down payment often leads to more favourable loan terms, such as lower interest rates or shorter loan durations.

In some cases, the size and terms of a down payment may be negotiable between the buyer and seller. Buyers should carefully consider their financial situation and budget when determining the size of a down payment. It’s important to strike a balance between making a substantial initial payment and ensuring they have sufficient funds for other financial priorities.

Example of down payment

Suppose you are buying a property valued at $200,000, and the lender requires a down payment of 20%. In this case, the down payment amount would be:

$Down\; payment=Purchase\; price\times Down\; payment\; percentage$

Down payment = $200,000 x 0.20 = $40,000

So, the down payment for the property would be $40,000. The buyer pays this amount upfront, and the remaining $160,000 is typically financed through a mortgage.