How down payments work
By Jude Wallis
A down payment is a percentage of price, and the loan is whatever is left. On a $400,000 home, 20 percent is $80,000 down and a $320,000 loan. At 5 percent the deposit falls to $20,000 and the loan rises to $380,000, which is the part that costs money every month.
Down payment
$80,000.00
Loan of $320,000.00 after 20.0% down.
- Down payment
- $80,000.00
- Loan amount
- $320,000.00
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In short
- 20 percent of $400,000 is $80,000, leaving $320,000 to borrow.
- 5 percent is $20,000 down and a $380,000 loan, so less cash today is exactly that much more debt.
- The 20 percent convention exists because it is the point at which mortgage insurance usually stops being required.
- The deposit also sets the opening loan to value ratio, which lenders price off.
- A larger deposit lowers the payment and the total interest, and lowers your cash reserves at the same time.
Two numbers move together
Every dollar of deposit is a dollar not borrowed, so the two sides of this calculation are locked together. On a $400,000 purchase, 20 percent gives $80,000 down and a $320,000 loan. Drop to 5 percent and it is $20,000 down and $380,000 borrowed.
The cash difference is the easy part to see. The borrowing difference is the one that repeats every month for thirty years, through both a larger payment and interest charged on a larger balance for the whole term.
Why 20 percent became the number
It is not a law and it is not an arithmetic threshold. It is the level at which mortgage insurance is typically no longer required, because the lender's exposure is covered by the borrower's equity. Below it, an extra monthly premium usually applies until enough equity is built.
That premium is the real cost of a smaller deposit, on top of the larger loan. The PMI calculator prices it, and PMI against 20 percent down compares waiting to save with buying sooner and paying the premium.
The deposit sets your opening loan to value
Loan to value is the loan divided by the price, so a $320,000 loan on a $400,000 home opens at 80 percent and a $380,000 loan opens at 95 percent. Lenders price off that ratio, so the deposit affects the rate offered as well as the amount borrowed.
As the balance falls and the property value moves, the ratio changes, which is what eventually removes a mortgage insurance requirement. The loan to value calculator tracks it, and how loan to value works covers how lenders read it.
Bigger is not automatically better
A larger deposit lowers the payment, the interest bill and the rate, and it also empties the account that would have handled a broken boiler in the first winter. Buying a home with no reserves left is a common way to end up borrowing again at a much worse rate. Weigh the deposit against the emergency fund the emergency fund calculator sizes, and check the resulting payment with the PITI calculator before fixing the number. This is educational material, not financial advice.
Worked examples
20 percent down on a \$400,000 home
A home costs $400,000 and the buyer puts 20 percent down. What is the deposit, and what is borrowed?
- 20 percent of 400,000 is $80,000.
- The loan is 400,000 minus 80,000, which is $320,000.
$80,000 down and $320,000 borrowed, an opening loan to value of 80 percent.
The same home at 5 percent down
The same $400,000 home with a 5 percent deposit.
- 5 percent of 400,000 is $20,000.
- That leaves $380,000 to borrow.
$20,000 down and $380,000 borrowed. The kept back today is carried as debt for the whole term.
Common questions
Is 20 percent required?
No. It is the level at which mortgage insurance usually stops being required, which is why it became the convention.
Do closing costs come out of the deposit?
No. They are additional cash needed at completion, so budget for them separately.
Is a larger deposit always better?
Not if it leaves no reserves. A home with no emergency fund behind it tends to create expensive borrowing later.
Is this financial advice?
No. It is educational material about how a deposit and a loan relate.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.