What is the difference between a down payment and closing costs?

By Jennifer Tucker
January 9, 2023 | 6 Min. Read

If you’re buying a home, chances are good that you’ve braced for the biggest expense: your down payment. But there are other expenses—like closing costs—you should also be saving up for.

You’ll pay the closing costs associated with your mortgage loan at the same time that you make your down payment. Let’s look at the difference between a down payment and closing costs in the home-buying process and answer some frequently asked questions about what to expect when you close on your loan.

A down payment on a house is the cash you pay upfront to complete the purchase of a home. Your down payment is usually a percentage of the purchase price ranging from as little as 3% to as much as 20%.

Closing costs are the expenses a buyer pays to complete the purchase of a home. They represent a range of fees related to your loan, including application, originating, and underwriting fees.

Making a down payment is a must when buying a home, but there are several factors to consider when determining the size of your down payment. In some cases, bigger isn’t better!

There are advantages to making a larger down payment.

Your down payment directly impacts your interest rate because the size of a borrower’s down payment often correlates to the risk of the loan. Making a larger down payment may reduce the amount you pay in principal and interest each month.

Certain types of loans (for example, an FHA loan) require mortgage insurance. Generally, a 20% or more down payment will help you avoid paying private mortgage insurance. Making a larger down payment may eliminate this additional monthly fee.

Your debt-to-income ratio (DTI) represents how much of your monthly income goes toward paying off debt. If you’re looking to take out additional loans in the future, a lower debt-to-income ratio (DTI) will give you more borrowing power. Making a larger down payment may give you a lower DTI.

There are advantages to making a smaller down payment.

It takes time to save for a 20% down payment, even decades. Making a smaller down payment can help you own a home sooner.

Using all your savings on a down payment might not be wise. New homeowners may unexpectedly need to make repairs or want to make renovations. Making a smaller down payment will ensure you have money set aside.  

Everyone needs an emergency fund to cover unexpected expenses like a broken furnace, a car repair, or medical bills. Making a smaller down payment will leave savings in the bank for emergency costs.

For years, the industry standard for down payments was 20% of the cost of the home. Fortunately, that’s no longer the case. Recognizing that a 20% down payment isn’t realistic for everyone, many lenders have taken steps to make homeownership more accessible. Today, the average down payment for a home is closer to 6%.

It is possible to buy a home by putting as little as 3% down, and some loans (like VA loans and USDA loans) require no money down.

Most homebuyers wonder how much down payment they need for a house. You may have heard you need a 20% down payment to buy a home. A down payment this large isn’t realistic for everyone, so many lenders have taken steps to make homeownership more accessible. Today, the average down payment for a home is closer to 6%.

For example, if you’re buying a home for $200,000, a 20% down payment would be $40,000. Depending on your income, saving up that much money may take years. A down payment of 10% would be $20,000, which is a bit more manageable. A down payment of 6% would be $12,000, which could be even more feasible.

Use our free online down payment calculator to estimate the amount of your down payment.

It is possible to buy a home by putting as little as 3% down, and some loans (like VA loans and USDA loans) require no money down. Remember, however, that the size of your down payment directly impacts your interest rate, and a higher interest rate means that you will end up paying more over the life of your loan.

A larger down payment typically means your loan balance will be less; therefore, your monthly payments will be smaller.

A larger down payment may lower your interest rate, while a smaller down payment may increase your interest rate. The size of a borrower’s down payment often correlates to the risk of the loan, which affects interest rates. A lower interest rate will help you save on your monthly payment and pay less interest over the life of the loan.

Closing costs are the expenses a buyer pays to complete the purchase of a home. They can represent a range of fees, including costs associated with appraisals and inspections, loan applications, and originating and underwriting the loan.

Closing costs include both property-related fees (associated with verifying the home’s value) and mortgage-related fees (associated with preparing the mortgage). Some of the common fees include application fees, origination fees, and underwriting fees.

The amount you pay in closing costs will vary but commonly depends on three key factors:

Use our free online closing costs calculator to calculate your home closing costs.

You might wonder if the buyer or the seller of the home pays for closing costs in a real estate transaction. Usually, the buyer is responsible for closing costs, and your amount will vary from transaction to transaction.

It’s difficult to avoid closing costs altogether, but there are some ways to negotiate or reduce the fees you’ll face at closing. You can consider lenders that offer discounts, look for low- or no-closing-cost loans, or ask the seller to contribute to the fees.