what is the difference between earnest money and down payment

Hello Imaxshift.com Readers, when you are buying a house, there are many terms that you will encounter that might be confusing. Two of those terms are earnest money and down payment. Both are important parts of the home buying process, but they are not the same thing. In this article, we will discuss the difference between earnest money and down payment.

Earnest Money

Earnest money, also known as a good faith deposit, is a sum of money that a buyer pays to the seller to show that they are serious about purchasing the home. It is usually a small percentage of the purchase price, typically 1-3%. For example, if the purchase price of a home is $300,000, then the earnest money deposit could be between $3,000 and $9,000.

Earnest money is typically held in an escrow account by a third party, such as a title company or an attorney. The money is held until the sale is finalized. If the sale falls through, the earnest money is usually returned to the buyer. However, if the buyer backs out of the sale for reasons that are not covered by the contract, such as simply changing their mind, the seller may be entitled to keep the earnest money.

Down Payment

A down payment is a sum of money that a buyer pays upfront towards the purchase price of the home. It is a percentage of the total purchase price and is typically between 3-20%. For example, if the purchase price of a home is $300,000 and the down payment is 10%, the buyer would need to pay $30,000 upfront.

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The down payment is important because it helps to determine the mortgage amount that the buyer will need. The larger the down payment, the lower the mortgage amount and therefore, the lower the monthly mortgage payment. In addition, a larger down payment may also result in a lower interest rate.

The Difference

The main difference between earnest money and down payment is that earnest money is paid upfront to show good faith in the purchase, while the down payment is paid at the time of closing and is a percentage of the total purchase price. Earnest money is typically a smaller amount, while the down payment is a larger amount that is used to finance the purchase.

Another difference is that earnest money is usually held in an escrow account until the sale is finalized, while the down payment is paid to the seller at closing. If the sale falls through, the earnest money may be returned to the buyer, while the down payment is usually lost.

Conclusion

Now you know the difference between earnest money and down payment. Both are important parts of the home buying process, but they serve different purposes. Earnest money is paid upfront to show good faith, while the down payment is paid at closing to finance the purchase. If you are planning to buy a home, make sure you understand both of these terms and how they apply to your purchase.

FAQ Answer
What happens to the earnest money if the sale falls through? The earnest money is usually returned to the buyer, unless the buyer backs out of the sale for reasons not covered by the contract.
Is the earnest money part of the down payment? No, the earnest money is a separate payment made upfront to show good faith in the purchase. The down payment is paid at closing and is a percentage of the total purchase price.
How much should I pay for earnest money? Earnest money is usually a small percentage of the purchase price, typically 1-3%. The exact amount will depend on the purchase price and the contract.
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