Down payment is a percentage of the cost of the home that is due on the day of closing. It is a cost that you must consider when thinking of purchasing a home. The minimum down payment is based on the loan-to-value (LTV) ratio of the loan product.

For example, if a home is valued at $100,000 and the lender uses a loan-to-value ratio of 80%, the lender would require a down payment of $20,000 and would give the borrower a mortgage for $80,000. If the down payment you make is less than 20 percent of the cost of the home, you will likely have to purchase mortgage insurance.

From the lender’s perspective, if you put a large down payment into the home, you’re less likely to default. With this lower risk comes better terms on your mortgage. While you may need no cash to purchase a home, having cash will allow you to secure a lower rate on your mortgage.   

Down payment funds can often be taken from retirement accounts subject to some restrictions.