Types Of Commission

1. 1. Commission We will look at 3 different forms of commission 1. Straight Commission 2.

Salary plus Commission 3. Graduated Commission
2. 2. Straight Commission Straight commission is when a person is paid a % of sales only.
Example 1 Harry receives 30% commission on the appliances he sells. If he sells a TV for
$350.00, a Refrigerator for $400.00 and a heater for $440.00 how much does Harry make in
commission? (350 + 400 + 440) = $1190 1190 x .30 = $357
3. 3. Straight Commission Juliet receives 25% commission on the appliances she sells. If she
sells a computer for $450.00 , a printer for $200.00 and a cellphone for$ 508.00, how much
does juliet make in commission?(diesel) 450+200+508=$1158 1158(.25)=$289.50
4. 4. Salary plus Commission This is exactly as it sounds, a person gets paid a salary and a %
of sales. example 2 Harry decides to work for another company that will pay him $350 per
week and 6% of any sales above $3000. If he sold goods worth $5688.00 what is his gross
pay? 5688 - 3000 = $2688 2688 x .06 = $161.28 Commission 161.28 + 350 = $511.28 Gross
Pay
5. 5. Graduated Commission This is when the % changes based on how much someone sells.
Example 3 Steve works for a company that pays him 1% on the first $5000 sold, 2% on the
next $15000 sold and 3% on all sales over $20 000. What is his gross pay if he sells $25
000? 5000 x .01 = $50 25 000 - 5000 = $20000 15000 x .02 = $300 20000 - 15000 = $5000
5000 x .03 = $150 50 + 300 + 150 = $500

Down Payment
REVIEWED BY JULIA KAGAN

Updated May 9, 2019

What Is a Down Payment?

A down payment is a type of payment made in cash during the onset of the
purchase of an expensive good or service. The payment represents a
percentage of the full purchase price; in some cases, it is not refundable if the
deal falls through because of the purchaser. In most cases, the purchaser makes
financing arrangements to cover the remaining amount owed to the seller.

For example, many homebuyers make down payments of 5% to 25% of the total
value of the home, and a bank or other financial institution will cover the
remainder of the costs through a mortgage loan. Down payments on car
purchases work in a similar fashion.

A down payment may also be known as a deposit, especially in England, where

0% to 5% deposit mortgages for some buyers are not uncommon.

Volume 75%
0:42
Down Payment
How Down Payments Work
Down payments decrease the amount of interest paid over the lifetime of the
loan, lower the monthly payments, and provide lenders with a degree of security.

Home Purchases
In the United States, a 20% down payment on a home is the standard for
lenders. However, there are ways to buy a home with as little as 3.5% down,
such as with a Federal Housing Administration (FHA) loan.

A situation in which a larger down payment may be necessary is when

purchasing within a co-operative property, which is common in many cities. Since
a buyer of a co-operative apartment is actually buying shares in a corporation
that entitle them to a corresponding home, many lenders will insist on 25% down.
Some high-end co-op properties may even require a 50% down payment,
although that is not the norm.

A down payment of 20% or more may get you a lower interest rate on an auto
loan.
Auto Purchases
In car purchases, a down payment of 20% or more may make it easier for a
buyer to get better loan rates, terms, or approval for a loan. Some dealers may
offer terms of 0% down for some buyers, which means no down payment is
required, though that usually means a lender will charge a fairly high interest rate
on the loan.

Special Considerations
Calculating a down payment is oftentimes a complicated endeavor. There are
some areas where more careful consideration than others is needed. Down
payments also offer lenders a certain degree of assurance. Essentially, if you
have invested in a down payment, you may be less likely to default on the loan.
Because of that assumption, mortgage lenders, in particular, may offer lower
interest rates to borrowers with large down payments.

Interest
When you make a down payment on a purchase and use a loan to pay for the
remainder, you instantly reduce the amount of interest you pay over the lifetime
of the loan. For example, if you borrow $100,000 on a loan with a 5% interest
rate, you owe $5,000 in interest in the first year of the loan alone.
However, if you have a $20,000 down payment, you only need to borrow
$80,000. As a result, during the first year, your interest is only $4,000, saving you
$1,000 in the first year alone. Thus, it pays to have a sizable down payment on
your mortgage as it will save you thousands of dollars in interest over the lifetime
of the loan.

If you are considering taking out a mortgage, use a mortgage calculator to

calculate interest and the total cost of the loan with various down payments.

Monthly Payments
Down payments also reduce monthly payments on installment loans. For
example, imagine you buy a car for $15,000. If you take out a loan for $15,000
with a 3% interest rate and a four-year term, your monthly payments are $332.
However, if you have a down payment of $3,000, you only need to borrow
$12,000, and your monthly payments fall to $266. That is a savings of $66 per
month or $3,168 over the 48-month life of the loan.

KEY TAKEAWAYS

 Make your down payment as high as you can afford in order to save on
interest payments on the remainder of the loan.
 Lenders may require a varying range of down payments (as low as 3.5%
and as high as 50% in the U.S.), depending on the borrower and property
type.
Mortgage Insurance
In most cases, if you put down less than 20% when you are buying a house, you
have to purchase private mortgage insurance (PMI). PMI is paid to a private
insurance company, and the monthly payments are called PMI premiums. If your
mortgage is secured by the FHA, you pay for insurance through the FHA.
However, if you put down a 20% down payment, you can avoid paying mortgage
insurance premiums.

Down Payment
An initial payment one makes on an asset financed with debt or otherwise paid in installments. For exa
mple, whenbuying a house, one usually makes a down payment of between 5% and 25% (depending lar
gely on the buyer's FICO
score and the availability of credit), and pays for the remainder of the house with a mortgage. Often, a l
arge downpayment qualifies one for a lower interest
rate on the loan financing the remainder of the purchase.

Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Down payment.
A down payment is the amount, usually stated as a percentage, of the total cost of a property that
you pay in cash as part ofa real estate transaction.
The down payment is the difference between the selling price and the amount of money you borr
ow to buy the property. Forexample, you might make a 10% down payment of $20,000 to buy a
home selling for $200,000 and take a $180,000mortgage.
With a conventional mortgage, you're usually expected to make a down payment of 10% to 20%.
But you may qualify for amortgage that requires a smaller down payment, perhaps as little as 3
%.
The upside of needing to put down less money is that you may be able to buy sooner. But the do
wnside is that yourmortgage payments will be larger and you'll pay more interest, increasing the
cost of buying.
Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

down payment
The balance of the purchase price for property after credits for money contributed by lenders.See
equity.
The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007
by The McGraw-Hill Companies, Inc.

Down Payment
The difference between the value of the property and the loan amount,expressed in dollars,or as
a percentage of value.
For example, if the house is valued at $100,000 and the loan is for $80,000, the down payment is
$20,000 or 20%.
Down Payment and LTV: In percent, the down payment is one minus the LTV—
the ratio of loan to value. In the example,the LTV is 80%, and 1 - LTV is 20%. Lender requirem
ents are always expressed in terms of a maximum LTV rather than aminimum down payment be
cause maximum LTV does not generate questions about what a down payment is.
Suppose the house in the example is purchased for $100,000 and the borrower has $20,000 for th
e down payment, but notthe $3,000 needed for settlement costs. The settlement costs are therefor
e added to the loan amount, raising it to $83,000.The LTV is now 83% and the borrower will be
obliged to pay for mortgage insurance.
The borrower may say, “Hold on, I'm putting down the same $20,000 as before.” However, the
mortgage insurancerequirement is set as a maximum LTV of 80% rather than a minimum down
payment of 20%, so the argument is over beforeit begins. In reality, the down payment is $17,00
0 or 17%.
Sale Price Versus Appraised Value: Home purchasers who pay less for a home than its appraise
d value frequentlyquestion whether they can use the difference as their down payment. They can
not. The rule is that the property value used indetermining the down payment and the LTV is the
sale price or appraised value, whichever is lower. The only exception tothis is when the seller pro
vides a gift of equity to the buyer, as discussed below.
Gift of Equity: Gifts of equity arise when a house is sold for less than its market value, almost al
ways to a family member. Inthis case, the lender recognizes that the house is being priced below
market and will accept the appraisal as the value. Mostlenders in such cases require two appraisal
s, and they take the lower of the two.
Gifts of equity should be structured to avoid gift taxes, which must be paid on gifts from a single
donor in excess of $11,000per
recipient per year. The maximum gift equals $11,000 x D x R where D is the number of donors a
nd R the number ofrecipients. For example, if the donors are a couple gifting a family of four, th
ey can provide a total gift of $88,000 without taxconsequences. Donors who want to gift more th
an the amount calculated from the formula should talk to a tax advisor.
Cash Gifts: Lenders will accept cash gifts for some part of the down payment, usually not for all
of it. While the rules vary fordifferent programs, it is common to require that the borrower contri
bute 3% of the down payment.
Lenders require a donor to sign a gift statement affirming that the funds provided are a gift rather
than a loan. The lenderwants assurance that the transfer of funds imposes no repayment obligati
on that could put the mortgage loan at risk.Sometimes, however, borrowers induce friends or fam
ily members who do not want to make gifts to lend in the guise of a gift.
For example, a house purchaser needs the equity in his current house to make the down payment
on a new one, but mustclose on the new one before the old one is under contract. Because there i
s ample equity in the old house, the buyer asks afriend or family member to lend the money need
ed for the down payment, to be repaid when the old house is sold.
This is a bad idea. Not only is it a fraud against the lender, it also involves risk to the donor. Cont
ingencies that could result innot
being repaid include a sharp drop in the value of the old house before it is sold, or the sudden dea
th of the home purchaser.
The home buyer in this situation should be advised to take out a home equity loan on the old hou
se, which can be repaidwhen it is sold. A home equity lender has a lien on the house and has dive
rsified its risk over many loans. The lenderpretending to be a donor has neither.
Land as Down Payment: Many people acquire land in order to build on it later, and the land serv
es as part or all of the downpayment. If the land has been held for some time, the lender will appr
aise the completed house with the lot, and thedifference between the appraisal and the cost of co
nstruction is viewed as the down payment.
For example, if the builder charges $160,000 for the house and the appraisal comes in at $200,00
0, the land is assumed tobe worth $40,000. A loan of $160,000 in this case would have a down p
ayment of 20%, or an LTV of 80%.
If the land was purchased recently, however, the lender will not value it for more than the purcha
se price. If the price was only$30,000 in the above example, the lender will value it at $30,000, a
nd the down payment will only be 15.8%, or an LTV of84.2%.
Home Seller Contributions: Home sellers often gift buyers, raising the price by enough to cover
the gift. The purpose is toimprove the buyer's ability to purchase the house by reducing the requir
ed cash. The practice is legitimate, provided it isdone openly and conforms to the guidelines of le
nders and mortgage insurers. For it to work, the appraiser must say that thehouse is worth the hig
her price.
For example, Jones offers his house to Smith for $200,000, which Smith is willing to pay. But un
der the best financing termsavailable to Smith, he needs $12,000, which he doesn't have.
So Jones and Smith agree that Jones will raise the price of the house to $206,000 and Jones will
gift Smith $6,000.Assuming the appraiser goes along, the amount of cash required of Smith drop
s from $12,000 to $6,360, making thepurchase affordable (see the table). Jones gets his price and
Smith gets his house, so everyone is happy—except, perhaps,the lender.
How a Seller Contribution Reduces the Buyer'sRequired Cash

Before After

Sale Price $200,000 $206,000

Appraised Value $206,000

Loan $194,000 $199,820

Down Payment (3%) $6,000 $6,180

Total Cash Required $12,000 $6,360

Down Payment (3%) $6,000 $6,180

Settlement Costs (3%) $6,000 $6,180

Gift from Seller 0 $6,000

Buyer's Stated Equity $6,000 $6,180

Buyer's Real Equity $6-12,000 $180-6,180

Appraisals often ratify sale prices, whether justified or not. If the house is actually only worth the
original offer price of$200,000, the buyer has only $180 of real equity—
the difference between the original property value and the higher loanamount—
rather than $6,180. Less equity means greater loss for the lender if the loan goes into default.
For this reason, lenders and mortgage insurers limit the size of seller contributions. The smaller t
he down paymentrequirement, the more critical the issue becomes. On conventional loans (loans
not insured by the federal government), it iscommon to restrict seller contributions to 3% of sale
price with 5% down and to 6% with 10% or more down.
Contributions Under FHA: On FHA loans, individual sellers can contribute up to 6% of the pric
e to the buyer's settlementcosts, but nothing to the down payment. However, FHA allows approv
ed nonprofit corporations to offer down paymentassistance using funds provided by sellers. Thes
e include www.nehemiah.org, www.partnersincharity.org, andwww.ameridream.org. The combi
nation of direct seller contributions to settlement costs on FHAs and indirect contributionsthroug
h down payment assistance programs, can add up to 9-10% of the sale price.
Investing in a Larger Down Payment: A larger down payment is an investment that yields a retu
rn that consists in part ofthe interest rate on the money you aren't borrowing. If you put an additi
onal $10,000 down, for example, you are borrowing$10,000 less and you save the interest that y
ou would have paid on it. But there may be other savings as well that make thereturn higher than
the interest rate on the loan.
First, most borrowers pay points or other loan fees expressed as a percent of the loan amount. If
you borrow $10,000 less,you save not only the interest but the upfront fees on the $10,000. Fees
of fixed dollar amounts don't affect the returnbecause they aren't reduced when the loan amount i
s reduced.
A second possibility is that the larger down payment reduces or eliminates mortgage insurance,
which must be purchasedwhen the down payment is less than 20% of property value. In such eve
nt, the return on the larger down payment includesnot only the savings in interest and points but
also the mortgage insurance that is eliminated by the larger down payment.
Still a third possibility is that the larger down payment reduces the interest rate by bringing the lo
an amount below theconforming
loan limit, at this writing $322,700. Because the federal secondary market agencies, Fannie Mae
and Freddie Mac, cannotpurchase mortgages larger than that amount, the market breaks at that p
oint. Interest rates are about 3/8% lower on loansbelow the maximum.
All these factors are pulled together in calculator 12a on my Web site, “Rate of Return from Inve
sting in a Larger DownPayment.” The calculator will show you, for example, that increasing the
down payment from 5% to 10% on a 30-year fixed-
rate loan at 7% and two points will yield 13.1% before taxes over eight years. If the larger down
payment dropped the loanbelow the conforming loan limit, reducing the rate to 6.625%, the retur
n on the amount invested in the down payment wouldbe 19.37%.
No-Down-Payment Loans: The availability of no-down-
payment loans (NDPs) is a strength of the U.S. mortgage systemand also a weakness. Some fami
lies become successful homeowners with the help of NDPs. Others, who shouldn't behomeowner
s, are enticed to try and fail.
NDPs have high default rates. This has been a finding of every study of mortgage defaults that I
have ever seen. One reasonis that homeowners who borrow the full value of their property have l
ess to protect should economic adversity strike. If theylose their job, or if property values decline
temporarily, they lose less from a default than borrowers with equity.
A second reason is that borrowers unable to accumulate a down payment have not demonstrated
budgetary discipline andthe ability to plan ahead. People able to save money every month before
they buy a home are much more likely to meet theirmonthly mortgage obligations afterwards.
Why do lenders make NDPs? When property values are rising, as they have most of the time sinc
e World War II, the risk ofdefault is reduced. Rising values create equity in houses that were initi
ally mortgaged to the hilt.
In recent years, furthermore, lenders have become more confident in their ability to assess the wi
llingness and capacity ofborrowers to repay their mortgages. Using credit scoring and other tools
, they judge that it is safe to give less weight to anapplicant's ability to accumulate a down payme
nt.
Lenders protect themselves, furthermore, by charging higher rates on NDPs. The rate includes a
“risk premium” to cover thelosses lenders expect from higher delinquencies and defaults.
Just because a lender is willing to give you a NDP, however, doesn't mean you should take it. Th
e risk premiums protectlenders, not you.
Some people are not cut out to be homeowners. When they default, the costs include not only los
s of their house, but alsohaving to find another one with all the disruptions to their lives that that
typically involves. Plus their credit rating goes into thetank. If many defaulters live in the same n
eighborhood, the neighborhood can also tank.
Securities as Down Payment: Some investment banks offer home loan plans where they accept t
he deposit of securities inplace of a down payment. If you purchase a house for $200,000, for exa
mple, the bank will lend you the entire $200,000,provided you deposit securities worth $40,000
with them. For the bank, the securities provide essentially the same protectionagainst default as a
down payment, while discouraging the customer from shifting the account to another bank.
These plans delay the accumulation of equity in the house indefinitely. The customer begins with
no equity, and if thepayment only covers the interest for the first 10 years, which is a common fe
ature, the only equity buildup is fromappreciation in the value of the property. The theory behind
this is that the consumer's overall wealth will grow more rapidly ifthe maximum amount is inves
ted in securities.
In the example, the consumer is in effect borrowing an additional $40,000 to invest in securities.
Whether this turns out to bea good idea or a bad idea depends on the yield earned on the securitie
s relative to the mortgage rate. It doesn't make senseto borrow $40,000 at 7% to invest in govern
ment bonds yielding 5.5%. It may make sense for consumers investing incommon stock, which
might yield 12% or more over a long period.