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Ask Charles Cherney - Question #4 - What is the downpayment?

What is the downpayment?

Ask Charles Cherney

In a residential real estate transaction, what is your downpayment?

The short answer is that your downpayment is the amount you are not mortgaging.

Let's say you are purchasing a property for $500,000. Your offer indicates your loan amount is 80% of the purchase price or $400,000. This means that your downpayment - the amount you are not mortgaging - is $100,000 or 20%.

Let's walk through this example of a $500,000 purchase with a loan amount of $400,000.

You write a check for $1,000 at the time of making the offer. This check is known as the binder check.

Your offer is accepted (congratulations!) and a week later you write a second check for $24,000 when the offer is replaced by the purchase and sale agreement (the p & s).

First check ($1,000) +  second check ($24,000) is $25,000.
$25,000 is 5% of $500,000.
5% is the amount you have put down at purchase and sale.
Remember, though, that the downpayment is the amount you are not mortgaging.
In this example the downpayment is $100,000 or 20% of the purchase price.
Therefore, at the time of the closing, you will need to have another $75,000 to add to the $25,000 you put down at purchase and sale. $75,000 + $25,000 is $100,000. $100,000 is the downpayment in this example. It is 20% of purchase price of $500,000.

The confusion with regard to the downpayment in our marketplace stems from the second check due upon signing of the purchase and sale. Oftentimes, buyers think of the purchase and sale check as the downpayment. However, to be clear, the downpayment is the amount you are not mortgaging.

And what if you are an all cash buyer who is not getting a mortgage? Well, that is amazing:)! The pure all cash buyer who is not getting a loan may think of their downpayment as the amount they are putting down at the signing of the purchase and sale, as essentially there is no amount that is not being mortgaged.

I help buyers buy and sellers sell in Cambridge and Somerville, MA. Here to help you. Let's talk.

Call me at 617-733-8937 or email me.

See more questions and more answers at AskCharlesCherney.com

Check out the Cambridge Somerville Buy Sell Report at CharlesCherneyBuySellReport.com

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