If you have decided to take a home loan, you must have done your research and during this research, you must have cone across some commonly used terms, such as loan tenor, interest rate, repo rate, cost of borrowing, down payment, etc. This article concerns itself with answering one important question: what is down payment? Read on to know the answer and everything else you must know on this topic.
What is Down Payment?
In general terms, when you buy any high-value asset, such as a home or car, a certain percentage of the total value of the asset must be paid by the buyer upfront and the remaining amount can be funded by a bank or a private lender. In very simple words, down payment is the difference between the total value of the property and the amount sanctioned as loan by the lender.
In terms of real estate, the home loan down payment is a part of the total value of a property that a homebuyer must pay upfront to secure the property. The down payment is usually non-refundable.
The down payment one has to make depends on the home loan eligibility criteria set by the lenders. While some lenders sanction a loan against as less as 10% down payment, others require borrowers to pay a slightly higher amount. In general, most lenders ask borrowers to pay at least 15% to 20% of a property’s value as down payment.
The concept of down payment is advantageous to both the borrower as well as the lender. When the borrower makes a down payment, their stake in the property increases, which reduces the risk involved for the lender in lending money to the borrower. Further, after the borrower has made the down payment, the property gets partially transferred in the borrower’s name. Therefore, the borrower develops some legal rights over the property in question. In conclusion, the concept of down payment is beneficial to both the lender as well as the borrower.
Those planning to apply for a home loan must try their best to pay as higher an amount as possible as down payment. The next section of this article discusses why.
Benefits Associated With Paying a Higher Down Payment
You May End Up Getting a Lower Home Loan Interest Rate
When a borrower makes a higher down payment, they essentially increase their stake in the property. Further, by paying a higher amount as down payment, they also enhance their lender’s confidence in their repayment capacity. Thus, when borrowers make a higher down payment, the lender usually offers them a lower home loan interest rate. A low interest rate benefits the borrower in many ways but most important of all, it makes home loan repayment simple and stress-free.
You May be Able to Make Your EMIs Affordable
– When you pay a high down payment, you essentially reduce the principal amount. Since the rate of interest is applicable on the principal amount, paying a higher down payment helps borrowers reduce their EMI and make them more affordable.
You May Be Able to Get a Loan Without Buying Private Mortgage Insurance
These days, most lenders ask borrowers to buy private mortgage insurance, which is lenders’ safety net in case the borrower is unable to repay the loan or defaults on it. However, when borrowers make a higher down payment, lenders allow them to go without buying private mortgage insurance, which is sometimes a huge relief.
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Final Words
Those planning to apply for a home loan must try their best to arrange for as higher a down payment value as possible. Paying higher down payment has several advantages. Though there is no upper limit on what percentage of a property’s value can be cleared as down payment, most lenders set the lowest limit at 15% to 20%. So, if you are planning to apply for a home loan, make sure you have arranged for at least 15% of the property’s value to be paid as down payment. If you can arrange a higher amount, even better.