Home loans, down payments are some of the common terms that we use today. Easy availability of home loans have made it more convenient to prospective home buyers for arranging finances. However, most of the home loan plans come with a clause for down payment, which is the initial payment to be made by the borrower, towards the purchase amount of the house.
In other words, initially, a small percentage of the purchase prize is paid in cash, and the remaining amount is funded by the lender. While home loans and other loans related to real estate are mostly associated with down payments, even car loans and loans for luxury goods may require the same.
Purpose of Down Payment
Apart from demonstrating the commitment of the buyer to the purchase, studies show that home loans with down payments are found to be repaid without fail, as the borrowers too have some real investments in their respective properties. Such borrowers tend to repay the mortgage loans regularly, till the settlement of the full amount.
Another advantage of down payment is that, from a lender's perspective, it can be viewed as an insurance. In case of default, a lender can recover the remaining loan amount by selling the property.
In other words, once the down payment is made; the buyer of the house secures a loan from the lender, to pay the remaining purchase price of the house. This house is used as a collateral for securing the loan; and in case of default, the mortgage lender can sell the house, and retain the remaining loan amount.
In such circumstances, the borrower will lose the house and the down payment. Most of them make the mortgage payments without fail. For a borrower, a down payment reduces the monthly installments of the loan amount, and may result in easier loan approval. It is to be noted that higher the loan amount, total amount you pay as interest would also increase.
How Much is the Down Payment on a House
Traditionally, an average down payment has been fixed as 20% of the purchase price. However, the percentage of down payment varies between 5% to 20%. With the recent boom in real estate prices, the lending institutions have become more lenient, and now, they allow a down payment, which is as low as 3%.
Sometimes, mortgage loans with no down payments are also allowed. In short, now there is no standard down payment. It can range between 3 to 20%. All you have to do is to choose the plan that is best suited for your budget.
3% of the purchase price can be considered as the minimum down payment on a house, but the option of 0% down payment is also provided. The home loans in the latter category can be more complicated.
One of the popular types of no down payment mortgage loans is 80-20 loan arrangement. In this case, 80% of the loan amount is given to the purchaser as the first mortgage, and the remaining 20% is given as the second mortgage loan. The borrower need not pay any down payment. There are various other schemes with zero down payment.
How to calculate down payment on a house? All you have to do is to calculate 20% of the purchase price of the house; if the lender agrees for 20% down payment . In other words, multiply the purchase amount by 0.20.
The resultant amount will be the down payment that has to be paid, to secure the home loan. If the home loan scheme requires 3% down payment, then multiply the purchase prize with 0.03. So, choose the right type of home loan, and buy your dream house.