Money down refers to a down payment on a purchase in order to reduce financing costs and monthly payments. Typical large purchases that call for money down are homes or real estate and vehicles or pleasure craft. In many cases lenders will try to entice buyers by offering special deals that require “no money down,” but these offers typically have higher interest rates and steeper monthly payments.
The amount of the down payment required on any particular purchase is usually one of the key deciding factors for buyers along with monthly payments. While it feels good to get something for very little or no down payment, financing greater sums means paying more interest over the long haul and shouldering higher monthly payments or installments. Buyers must choose between placing less money down and borrowing more, or making a larger down payment and borrowing less.
In the case of buying a first home, lenders typically prefer to have a minimum of 20% of the value of the home as a down payment. On a house selling for $325,000 US Dollars (USD), the minimum down would be $65,000 USD. This isn’t a hard and fast rule, just a general guideline. Assuming the buyer does pay 20% down, the financing company (lender) makes up the balance on the buyer’s behalf so that the seller gets paid in full. Now the buyer owes the lender $260,000 plus fees and finance charges.
Depending on the type of loan, the buyer might spend the first several years making payments that go towards interest only, before ever working off the principle. In many cases people turn over property within a few years, using the buyout price to pay off the old mortgage loan. If the property has appreciated enough, the seller ends up with enough profit to put money down on a new piece of property, usually a larger house or a house in a nicer area. In other words, the buyer upgrades.
While real estate is generally considered to be a good investment that appreciates with time, buying vehicles or pleasure craft present a different equation. New vehicles, for example, significantly drop in value the moment they are driven off the lot as they go from being classified as “new” to being reclassified as “used.” Consequently, a buyer tempted by a “zero money down” offers can find that his or her loan is significantly higher than the worth of the vehicle for the first two or more years of the loan period. If the buyer has a solid and substantial means of income and simply no cash on hand, this can be a good deal worth the trade off. But that’s not always the case.
No down payment offers can tempt some people to buy vehicles beyond their means. Once the newness wears off, these people find themselves stuck with steep monthly payments and high finance charges that can dog tight monthly budgets. In some cases this results in cessation of loan payments and repossession of the vehicle.
In real estate, there are many good reasons for only making a small down payment on property assuming a comfortable mortgage payment. It creates better cash flow and can have tax benefits. The opposite is true for vehicles and most other big-ticket items. In these cases, it’s considered better to put as much money down as possible. The less you finance, the lower your monthly payment will be and the more money you’ll save in the long run.