There are several financial terms that you encounter when seeking a home loan. One of the most common and important ones includes, down payment. A down payment covers a portion of the total purchase price on the debt purchase of any expensive item. It is typically an amount that you pay yourself, out-of-pocket.
In the case of a home loan, the down payment is paid to the home loan lender. The payment comprises of a percentage of the total cost of the home and the remainder is paid in the form of home loan EMIs.
Down payments can affect the borrowing costs through the tenure of the loan. Thus, it is important to understand the several factors that affect down payment:
Sources of funds for a down payment – A down payment amount can come from a number of sources including:
- Your personal savings
- Money obtained from the sale of a home
- Monetary gifts received from friends and family
- Grants from employers or non-profit organizations
The need for down payment – As part of lending a home loan, financial institutions encounter a degree of risk and the down payment helps offset the same. The higher the amount paid by you as down payment when buying a home through a loan, the lower their risk in the case of foreclosure.
As a home loan borrower, putting a down payment not only gives out a good sign that you are ready for ownership but also determines the amount that you can borrow. It also affects the rate of interest that you will be paying with the home loan EMIs.
The minimum down payment on a home loan – The total cost of a down payment for a home loan will vary depending upon the type of loan that you get. It is also affected by the requirements of the lender. Factors such as credit-score and the debt-to-income ratio can influence the minimum amount of down payment required to approve your loan. In most cases, conventional home loan lenders will expect of you a 20 percent down payment.
How does a bigger down payment benefit you – A bigger down payment will help in several ways. You are likely to be offered a lower interest rate as it reduces lender’s risk in the case of default on the loan. Importantly, making a larger upfront payment will bring down your burden with your monthly EMIs and bring you better borrowing power in the future.