What is the purpose of a down payment when getting a mortgage?

The purpose of a down payment when getting a mortgage is primarily to reduce the total loan amount and the interest paid over the life of the loan. By making a down payment, which is a percentage of the home's purchase price, the borrower lowers the principal amount of the mortgage they need to finance. This reduction in the loan amount directly leads to lower monthly mortgage payments, and the interest paid on the loan is calculated based on this principal amount. Additionally, a larger down payment may lead to more favorable loan terms, including a lower interest rate, which can further decrease the total cost of borrowing.

Choosing to put less money down could require the borrower to pay for private mortgage insurance (PMI) if the down payment is less than 20% of the home's value, which adds to the overall cost. Therefore, making a substantial down payment can also help avoid this extra expense while providing a stronger equity position in the home from the start.