Housing Down Payment Tips

A down payment is a financial transaction wherein you pay the agreed percentage of the product. This is done for varying reason but usually to assure the seller that the buyer is serious in purchasing the product.

This fact also holds true for home buyers. You can seek mortgage but some properties will usually insist on the option of asking a down payment. The usual practice for a down payment on property is 20% and the rest would depend on your mortgage agreement.

But a 20% or any percentage for a down payment is only optional. Every consumer needs to check some facts first before agreeing to a down payment. While there are situations wherein a down payment will be for the advantage of the purchaser, a down payment could work against those who are interested in the property.

Advantages on Down Payment

• Aggressive Interest Rates – If you have signified that you are more than willing to pay for a down payment on a property, mortgage companies and lenders will put their best foot forward to attract you in doing business with them. This will lead to better interest rates and even negotiate as you continue to shop around for more lenders who are willing to drop the interest rate.

• No Private Mortgage Insurance – Also known as PMI, this type of insurance is a requirement for those who do not have any down payment. The fact that you already have an upfront down payment means you are sparing the company the trouble of using the insurance in case you are unable to pay your monthly due. If you pay 20% up front, you are assuring the company you are serious about the property and will most likely reach the full amount.

• Lower Monthly Payment – The best part of a down payment is that it will spare you with a large monthly payment. The rest of payment could be distributed to 30-year agreement which will significantly reduce your monthly payment.

Unfortunately, there is a dark side for down payments in the real estate industry. Particularly during this time where the country is experiencing recession and prices of properties are significantly dropping.

• Availability of Funds – If a property costs $100,000 you need to come up with $20,000. Taking out another loan to fund this down payment is just a big head ache. You are basically taking out another loan so that you can have another loan when the mortgage starts. That means you have to pay for two loans – one for the down payment and other one for the mortgage. The interest rate of these loans could have been reduced if you go with a single loan only.

• Saving for a Down Payment – If you opted to save $20,000 just for a down payment, you will probably spend at least six months to come up with that money – during that time the housing industry could slowly pick up. The value of the property that you could enjoy right now will be long gone. By the time you have $20,000, the property might already be $150,000.

• Lost Investment – The money you save today will most likely stay in a bank through savings account since you wanted to make sure it stay safe and accessible. But the money could have been placed in low risk investment wherein it could earn a lot more than the savings you would have by paying the down payment.

If you have cash right now to spend on a down payment, make sure you still have some extra left for emergency funds. It is no use saving all that money for a property because there are better ways on how you can spend your down payment.