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Things to Know About Down Payment of Your House

Down Payment for your home
Down Payment for your home

Things to Know About Down Payment of Your House

All you need to know about the Down Payment for your home

Buying a home is a big decision, and you need to prepare for the responsibility that comes with it. Securing a home loan is an optimal way of getting financial help to buy your own house. The initial non-refundable payment that is paid when you get a home loan is called the down payment.

The home buyer gets the ownership of the property by paying this amount. Down payments will be adjusted against the repayment of the principal and the accrued interest over the tenure of the loan.

The lender generally asks for a 20% down payment upfront. This can be a sizeable amount and you need to procure the money before you close the deal on a home loan. The lender feels more secure when down payments are made as they get an initial payment. The financial institutions have now come up with low interest rates home loan that require a lower down payment too.

Benefits of higher down payment

Perhaps the most tangible benefit that you get with paying a higher down payment is that the loan amount is reduced and your financial burden is lower. The lender has a better chance of sanctioning the loan if the down payment is on the higher side. There are many benefits a home owner can look out for if he/she pays a high down payment.

  • Home loan interest rates are appreciably lower when the down payment is high. The risk of the lender is lower, and there are fewer chances of defaults.
  • The lender will often be open to negotiating waivers or reducing charges inherent in a housing loan. These could be administrative charges, login charges and so on.
  • The monthly outflow to pay Home Loan EMIs is appreciably lower as a part of the payment is done upfront. This benefit comes in handy when you are going through a lean period.
  • You have a better chance of securing further loans in the future as your debt to income ratio will be lower. The debt to income ratio is a comparison between your monthly net income and the debt you carry. You are given better offers as the lender perceives that you have the potential to repay loans as your monthly obligations are low.
  • A higher down payment means that you have higher equity in your home. The more the repayment, the higher the equity the home owner has in the property. For example, if you have bought a home loan for one crore and you have paid 20% initially you already have a 20% stake in the property as you keep repaying the loan, the equity increases. You can secure an additional loan against property against this equity.

Hence, it makes sense to make a hefty down payment when you apply for a home loan.. You can use a home loan calculator to figure out the EMI amount. You can simply enter the down payment amount and desired tenure along with the tentative home loan rate in the home loan EMI calculator to get an idea of what you need to pay every month.

Pitfalls of higher down payment

There are pros and cons to every decision you make. Similarly, for determining the right amount of down payment when you are planning to take a loan needs careful thought. There are many benefits of higher initial payments, but there could be some pitfalls too.

  • You need to save for years before you have enough to buy your dream home to pay a big upfront payment. Many home buyers end up taking a loan to pay the down payment. As housing loan interest rates are lower than other types of loans, you end up with a bigger interest burden.
  • You end up having no emergency funds. If you put up too much cash for the initial payment, you may end up with no money for emergencies like illness or accidents.
  • The home needs improvement, repairs and interior decoration to make it livable. If you have a high down payment, you may struggle to spend on comfort.
  • A high down payment also means that a significant amount is stuck in a fixed asset. You will not have the liquidity to fund a business, vacations or save for retirement or children’s education.
  • If you are not planning to live long in the house you buy, shelling out a high down payment may not be too wise.

How much down payment to make and why?

How much down payment you pay is a personal preference. It depends on a lot of factors.

  • Your financial situation and cash flow need to be assessed.
  • The monetary requirements you may have over the tenure of the loan will determine how much cash you can afford to put up initially.
  • Whether you are planning to fund any other expenses like a car, new business, starting a family and so on plays an essential role in your decision. You should put aside the required amount and then decide.
  • What home loan rates you are offered if you put up a larger down payment is another factor. As the tenure of a home loan is long, even a small difference in interest rates may save you a lot of money.

Additionally, there are many allied costs in closing a loan. You can make rough estimates of the stamp duty, lawyer costs, registration costs, and other administrative charges. It is prudent to ascertain what you can afford to put down as the initial payment after all the calculations when you apply for a home loan. Once you deduct these coats from the available funds, you can get a clear picture of what you can pay to the lender as a down payment.

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The views expressed in the article are those of Standard Chartered Bank (“SCB”) and do not constitute financial, professional or other advice. SCB, including its Directors, Officers or Employees shall not in any event be liable for any damages or injury arising merely from your reliance on any information provided here. Each bank / financial institution will have its own processes/ fees/ charges and any information contained in this Article is only indicative. Before placing any reliance on any information contained or views expressed in this Article, we would request you take all steps necessary to verify the correctness thereof. The information contained in this Article is only indicative. Each Standard Chartered Bank Product has its own terms & conditions and should be referred to in entirety. We request you to kindly visit “sc.com/in” or visit your nearest Standard Chartered Bank Branch or call on our Customer Care numbers for more details.