Down payments explained

A down payment is the part of a home's price you pay in cash at closing instead of borrowing. It sets the size of your loan, and the loan size drives almost everything else: the monthly principal and interest (P&I), whether you pay private mortgage insurance (PMI), and how much interest you pay over the life of the loan. A bigger down payment lowers all three, but it also means handing over more of your savings on day one.

How the down payment sets the loan amount and LTV

The arithmetic is simple. Take the purchase price, subtract the down payment, and what is left is the amount you borrow. On a $375,000 home, a $75,000 down payment leaves a $300,000 loan; a $37,500 down payment leaves a $337,500 loan.

Lenders describe the same thing as a ratio. Loan-to-value (LTV) is the loan amount divided by the home's value, expressed as a percentage. A $300,000 loan on a $375,000 home is 80 percent LTV; a $337,500 loan is 90 percent LTV. Down payment percent and LTV always add up to 100, so a 10 percent down payment means 90 percent LTV.

Loan = Price − Down payment;  LTV = Loan ÷ Price × 100

LTV matters because lenders use it to judge risk. A lower LTV means the borrower has more of their own money in the home, which is why it can affect the interest rate you are offered and whether mortgage insurance is required. The mortgage calculator reports the LTV for whatever down payment you enter and uses it to decide whether an estimated PMI charge is included.

What the down payment changes

Three outputs move when you change the down payment, and they all move in the same direction.

Monthly P&I. The scheduled payment is calculated from the loan amount, the interest rate and the term. A smaller loan at the same rate and term produces a smaller payment. The relationship is proportional: borrow 12.5 percent more and the P&I is about 12.5 percent higher. How mortgage payments work walks through the payment formula itself.

PMI. When the LTV is above 80 percent, most conventional loans carry private mortgage insurance, which protects the lender rather than you. The calculator estimates PMI as an annual percentage of the original loan amount (0.5 percent by default) divided by 12, and assumes it ends automatically once the scheduled balance reaches 78 percent of the original price. You may be able to request cancellation earlier at 80 percent LTV if you meet your servicer's conditions. What is PMI and when does it go away? covers the rules in more detail.

Total interest. Interest each month is the outstanding balance times the annual rate divided by 12. A larger balance means more interest in every single month, and because the loan runs for hundreds of months, the difference compounds into a large lifetime figure.

A worked example: 10 percent vs. 20 percent down

Suppose you are looking at a $375,000 home with a 30-year fixed-rate loan at 6.5 percent, and you are weighing $37,500 down (10 percent) against $75,000 down (20 percent). Property taxes, insurance and HOA dues are left at zero here so the comparison isolates the loan itself. All figures are estimates based on these assumptions.

Read across the rows. The extra $37,500 up front reduces the P&I by about $237 per month for the entire term. In the early years the gap is wider, roughly $378 per month, because the 10 percent scenario also carries an estimated $141 of PMI until the balance falls to 78 percent of the price, which takes about 109 payments on the schedule.

Over 30 years, the 20 percent scenario pays about $47,826 less interest and avoids about $15,329 of PMI, a combined difference of roughly $63,154. That is what the larger down payment buys, spread over three decades.

There is a fair way to look at the other side. The 10 percent buyer keeps $37,500 in the bank on closing day. That money is available for repairs, a job loss, or other goals, and the extra monthly cost is the price of that flexibility. Neither choice is automatically right; the numbers simply make the trade explicit.

The 20 percent rule of thumb

The 20 percent figure comes from the PMI threshold: at 80 percent LTV or below, conventional loans generally do not require mortgage insurance. Because PMI disappears exactly there, 20 percent became shorthand for "the down payment that avoids extra cost."

It is a useful landmark, but it is not a rule. Loan programs exist with much smaller minimums, and a large share of buyers, especially first-time buyers, put down less than 20 percent. Saving 20 percent of a $375,000 price means accumulating $75,000, which can take years, and home prices may rise in the meantime. Many people conclude that buying sooner with PMI costs less than waiting.

Lenders also tend to price in steps, so the difference between 5 and 10 percent down, or 10 and 15 percent, can matter for the rate you are offered as well as for PMI. The table below shows how the estimated figures change across common down payment sizes on the same $375,000 home.

Each additional 5 percent down lowers the P&I by roughly $118 to $119 per month and shortens the PMI period by two to three years, until PMI disappears entirely at 20 percent.

What changes the outcome

The interest rate. At higher rates, every borrowed dollar costs more, so the interest savings from a larger down payment grow. At lower rates, the gap narrows and keeping cash becomes relatively cheaper.

The loan term. A 15-year loan pays far less total interest than a 30-year loan on the same balance, so the lifetime interest saved by a larger down payment is smaller in dollars, though the monthly payment difference is larger.

The PMI rate. The calculator's default of 0.5 percent per year is a placeholder. Real PMI pricing depends on credit score, loan type and LTV, and can be noticeably higher or lower. Enter your own rate, or a quoted monthly amount, to tighten the estimate.

How long you keep the loan. The lifetime figures assume you make every scheduled payment for the full term. If you sell or refinance after seven years, the interest difference you actually experience is much smaller than the 30-year total.

Extra principal payments. Adding to the principal each month brings the balance down faster and can end PMI sooner. This can partly substitute for a larger down payment while leaving your reserves intact at closing.

Common mistakes

Treating 20 percent as mandatory. It avoids PMI, but a smaller down payment with PMI is a legitimate choice. The question is what the PMI and extra interest cost against the value of keeping the cash.

Draining reserves to hit a threshold. A down payment that leaves nothing for closing costs, moving, an immediate repair or a few months of expenses can put the whole purchase under strain. Financial educators commonly suggest keeping a cushion of several months of expenses after closing.

Forgetting closing costs. The down payment is separate from closing costs, which are typically a few percent of the loan amount and are due at the same time. The calculator reports the down payment on its own and does not include cash to close.

Comparing payments without PMI. Two scenarios with the same P&I can have very different monthly housing payments once PMI, taxes and insurance are added. Compare the total monthly housing payment, not just P&I.

Assuming PMI lasts forever. Under the automatic termination rule, PMI on a conventional loan ends when the balance is scheduled to reach 78 percent of the original value, and you can often request cancellation at 80 percent. It is a temporary cost, which is why its total is much smaller than the interest difference.

Ignoring what the money could otherwise do. Cash used for a down payment is no longer available to pay down higher-rate debt or to cover an emergency without borrowing. That opportunity cost is real, even though the calculator does not model it.

Down payment

The portion of the purchase price paid in cash at closing rather than financed. Entered in dollars or as a percent of the price.

Loan amount

Purchase price minus down payment; the principal on which interest is charged.

Loan-to-value (LTV)

Loan amount divided by the home's value, as a percentage. A 20 percent down payment equals 80 percent LTV.

Private mortgage insurance (PMI)

Insurance that protects the lender on conventional loans with LTV above 80 percent. Estimated here as an annual percentage of the original loan, ending when the scheduled balance reaches 78 percent of the original price.

Cash reserves

Savings kept available after closing for emergencies, repairs and other costs rather than committed to the down payment.

Try it with your own numbers

Enter a home price and drag the down payment between 5 and 20 percent to see how the estimated loan amount, LTV, monthly P&I, PMI and total interest respond. Then use the comparison view to set two down payment scenarios side by side and decide what the difference in cash on closing day is worth to you.