Down payment

Down payment

Down payment (or downpayment) is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.[1] A loan is then required to make the full payment.

The main purpose of a down payment is to ensure that the lending institution can recover the balance due on the loan in the event that the borrower defaults. In real estate, the asset is used as collateral in order to secure the loan against default. If the borrower fails to repay the loan, the lender is legally entitled to sell the asset and retain a portion of the proceeds sufficient to cover the remaining balance on the loan, including fees and interest added. A down payment in this case reduces the lender's risk to less than the value of the collateral, making it more likely that the lender will recover the full amount in the event of default.

The size of the down payment thus determines the extent to which the lender is protected against the various factors that might reduce the value of the collateral, as well as lost profits between the time of the last payment and the eventual sale of the collateral.

Furthermore, making a down payment demonstrates that the borrower is able to raise a certain amount of money for long-term investment, which the lender may desire as evidence that the borrower's finances are sound, and that the borrower is not borrowing beyond his or her means.

If the borrower is unable to pay off the loan in its entirety, he/she forfeits the down payment amount.

Amounts

In the United States, down payments for home purchases typically vary between 3.5% and 20% of the purchase price.[2] The Federal Housing Administration, or FHA has advocated lower down payments since its inception in 1934, and currently, borrowers that qualify for an FHA loan pay only 3.5% for a down payment. With rising home prices in the years from 2000 to 2007, lenders were willing to accept smaller or no down payment, (either through 100% Financing, seller-assisted down payment assistance, government down payment providers, or by providing a combination of an 80% 1st and 20% second mortgages), so that more individuals could purchase homes as their primary residences. This trend has been largely reversed since that time.[3][citation needed] However, in the United States, the VA or Department of Veteran's Affairs, offers 100% financing for qualifying veterans. There are also numerous state and local municipality programs that vary in down payment amounts from zero to $1000 down.

For car purchases the down payment could be anywhere between 3% and 13%. Similar for purchases of comparable price.

There is more risk for lenders when individuals purchase a home as an investment property. Therefore the lender may charge a higher interest rate and expect a higher down payment.

References

  1. ^ "Down payment", in Dictionary.com
  2. ^ "HUD"
  3. ^ Hawn, Carleen (2005-09-01). "The low-down-payment empire". CNN Money. http://money.cnn.com/magazines/business2/business2_archive/2005/09/01/8356509/. Retrieved 2008-09-05. 

See also


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Look at other dictionaries:

  • Down payment — ist ein englischer Begriff für Vorauszahlung oder Anzahlung. Er wird im Zusammenhang mit Kaufverträgen, Lizenzverträgen oder Franchiseverträgen für die erste Zahlungsrate (ggf. auch die ersten Raten) verwendet. Bei Kaufverträgen, die mit… …   Deutsch Wikipedia

  • down payment — ➔ payment * * * down payment UK US noun [C] ► COMMERCE a payment of part of the total cost of something that you make when you buy it. The rest of the cost is usually paid over a period of time: make/put a down payment on sth »I ve put a down… …   Financial and business terms

  • down payment — I noun collateral, deposit, installment, payment, retainer, stake, surety II index deposit, handsel, installment Burton s Legal Thesaurus. William C. Burton. 2006 …   Law dictionary

  • down payment — down payments also downpayment N COUNT If you make a down payment on something, you pay only a percentage of the total cost when you buy it. You then finish paying for it later, usually by paying a certain amount every month. If you re borrowing… …   English dictionary

  • down payment — n a payment you make when you buy something that is only part of the full price, with the rest to be paid later ▪ We ve almost got enough money to make a down payment on a house …   Dictionary of contemporary English

  • down payment — noun count a first payment that you make when you are buying something and are going to pay the rest later …   Usage of the words and phrases in modern English

  • down payment — ► NOUN ▪ an initial payment made when buying on credit …   English terms dictionary

  • down payment — ☆ down payment n. an initial, partial payment on a purchase …   English World dictionary

  • down payment — noun a partial payment made at the time of purchase; the balance to be paid later • Syn: ↑deposit • Hypernyms: ↑payment • Hyponyms: ↑margin, ↑security deposit * * * noun, pl ⋯ ments [count] …   Useful english dictionary

  • down payment — n. 1) to make a down payment 2) a down payment on * * * a down payment on to make a down payment …   Combinatory dictionary

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