Down payment

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A down payment is the money you must provide when trying to acquire a loan to buy a house, automobile or other asset. For example, when buying a house banks typically like to see you put 20% of your own money into the property. Banks feel safer investing their money into a mortgage where you already owned 20% of the house. This is because the value of the house and drop by 20% and the bank will still not losing money on a foreclosure. Banks know that you're likely to take better care of the house the higher percentage of it you own.

It wasn't that long ago the down payments were typically 50% of the purchase price. This meant the risk to the bank was very low and also help to ensure that most people did not buy a house that was outside of their means.

When you try to buy a house and cannot put down 20% of the purchase price, banks will want you to pay for private mortgage insurance. This insurance will help cover the bank's losses if you default on your loan. Typically, you can stop paying for mortgage insurance once your principle payments have reached 20% of the amount the property was purchased for. However, banks may not take this off automatically so you should double check what you get close to that threshold.

Mortgage insurance is often referred to as PMI. So you may see PMI written into your legal documents.