Definition of Down Payment

What is a down payment? What is the definition of a down payment? What does the term down payment mean?

A down payment occurs when a percentage of a credit purchase is paid in cash. The down payment is not only a sign of good faith that the purchaser intends to follow through on the purchase, but it also minimizes the risk for the seller.

Down Payment definitionAn example of a down payment? Let's say that you are purchasing a new apartment for $200,000. In order to secure a mortgage, you must put down $40,000 in cash in order for your bank to approve you.

The $40,000 would be the down payment in this case.

In the example listed above, you'd be paying for a percentage of the purchase in cash, with the rest of the purchase being financed with credit. The $40,000 is not only a sign of good faith that you are willing to complete the transaction, but it also gives the bank some security in case you decide to walk away from the mortgage.

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