“How much money do I have to save up?” And “what impact will have a loan in my credit score?” Are some of the most common questions to ask yourself when buying a house. But buying a house doesn’t have to be scary at all. As long as you know the basics. And it could start in the following question:
What is a down payment?
A down payment is one of the first steps done when buying an expensive good or service, often in cash. It is also known as a deposit. In this real estate context, this type of payment represents a percentage of the full house’s sales price.
Most of the time, homebuyers make payments between 5% and 20% of the total value of the home and often combine it with the help of a mortgage. So…
How does a down payment work?
Down payments help home buyers to decrease the amount of interest they have to pay over time because of a loan. So, they use it to provide the lender a degree of security.
In the United States of America, paying 20% down payment on a home is them most common thing. This is because less than that will just increase expenses in the future. That being said, there are some situations where larger down payments are necessary. For example, when buying co-operative properties.
A down payment is the biggest obstacle to many first-time home buyers. That is why they often turn to loans with minimum down payments. And many of these loans require borrowers to purchase a private mortgage insurance (PMI). However, if the home buyer puts down a 20% down payment, they can avoid paying mortgage insurance premiums.
Interests and houses
When a home buyer makes a down payment to purchase a house and then uses a loan to pay what is left, it instantly reduces the amount of interest they have to pay in the future.
For example, if $100,000 is borrowed on a loan with a 5% interest rate, the interest owed will be $5,000 in the first year alone. Instead, if the down payment is $20,000, only $80,000 needs to be borrowed. As a result, during the first year, the interest is only $4,000, saving $1,000 in the first year.
Monthly mortgage payments
Many financial experts agree that having a down payment is good. This is because a down payment can help a home-buyer to reduce the monthly payments on loans. And it also reflects that you are ready to own a house.
If you can do what you have to do in order to amass a down payment, then you may be ready to compromise yourself to monthly mortgage payments, property taxes and maintenance costs.
To take into considerations
Down payments offer lenders a certain degree of security. This means that if a home buyer has invested in it, they are less likely to default on the loan. Thanks to that assumption, mortgage lenders may offer lower interest rates to borrowers.
Why mortgage lenders require a down payment?
Very few mortgage programs allow zero-down financing. Requiring a down payment on a home reduces different kinds of risks to lenders, such as:
- Home buyers with their own money invested are less likely to default on mortgages.
- In case the lender has to foreclose and sell the property, it is possible it will not be sold in its entire home’s value price. Therefore, it can limit its potential losses if the property is sold for less than the remaining mortgage balance.
- Also, saving up some money for a down payment requires discipline. When preparing a home buying budget, this can set up borrowers for successful homeownership
