What is a down payment?

Study for the FDIC AIDT Ready-To-Work (RTW) Money Smart Exam. Practice with multiple-choice questions, each with hints and explanations. Prepare for your assessment!

A down payment is the initial amount of money that a buyer pays upfront when purchasing a home, which is typically represented as a percentage of the total purchase price. This payment reduces the overall loan amount that the buyer must borrow from a lender to complete the purchase. A higher down payment might also lead to a lower interest rate on the mortgage and can eliminate the need for private mortgage insurance (PMI). This concept is crucial in home buying, as it helps demonstrate the buyer's investment in the property and can influence mortgage terms and conditions.

The other options describe different financial concepts but do not accurately define a down payment. An extra fee charged by lenders and a monthly fee associated with home ownership do not pertain to the initial investment in the property, while an annual payment on a loan refers to ongoing obligations rather than the initial upfront cost required when making a purchase.

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