Down Payment on a House

Home loans and down payments have become some of the most familiar terms that we use today. Easy availability of home loans have made it much more comfortable for prospective home buyers to arrange for finances. However, most of the home loans come with a clause for down payment, which is the initial payment made by the borrower, towards the purchase amount of the house. In other words, initially, certain amount of the purchase prize is paid in cash, and a loan is required to pay the remaining amount. 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 it.

Purpose of Down Payment on a House

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 so as to pay the remaining purchase price of the house. This house is used as collateral for securing the loan and in case of default, the mortgage lender can sell the house and retain the remaining loan amount.

In these circumstances, the borrower will lose the house as well as the down payment. So, most of them make the mortgage payments regularly. Otherwise too, down payments are beneficial to the borrower, who knows that in case of default, he has to recover the lesser amount, if there is down payment. For a borrower, a down payment lessens the monthly installments of the loan amount and may also result in easier loan approval.

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 as low as 3% and even mortgage loans with no down payments are 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 scheme 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 payments. 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% (if the home loan scheme requires you to pay 20% down payment) of the purchase price of the house. In other words, multiply the purchase amount by 0.20. The resultant amount will be the down payment you have to pay to secure the home loan. If the home loan scheme requires 3% down payment, then, multiply the purchase prize with 0.03. Now, that you know more about down payment, you can choose the right type of home loan for you and buy your dream house.