The term "down payment" is used in the context of buying large expensive items like cars and houses, whereby a loan is required to make the full payment. The down payment is the initial upfront portion of the payment, usually given in cash. The main purpose of a down payment is to ensure that the lending institution can easily recover the amount of the loan in the event that the borrower goes into default.

Typically, a loan involving a down payment is obtained for the purpose of purchasing some sizable asset such as a home or a car. The asset in question is then used as collateral in order to secure the loan against default. If the borrower fails to repay the loan, the lender is legally entitled to sell the asset and retain a portion of the proceeds sufficient to cover the original amount of the loan. By requiring a down payment in advance, the lender greatly increases the chance that any such future sale would be able to cover the full amount of the loan, because such a sale only requires the lender to recover the difference between the original selling price and the amount of the down payment, as opposed to the entirety of the original selling price. If you've got the money, there are advantages to putting 20% down. For one thing, you immediately have substantial equity in your home. This may be important to you psychologically, and that counts.

In addition, you'll avoid having to pay private mortgage insurance. Various incentive programs and more complex lending solutions, which may bring the down payment needed down to nothing, now exist for first-time buyers and veteran buyers alike. The 80-20 loan arrangement is one which has become relatively popular, in which the first 80% of the loan is taken out as a first mortgage, and the remaining 20% is taken out as a second mortgage, leaving the buyer with no down payment commitment, simply less beneficial terms than they might otherwise have. Interest-only loans are another path which may allow a buyer to pay a substantially smaller down payment than 20% -- often as low as 3-6% of the total cost.