Home Purchase Down Payment

Real Estate Blog

If you are in the market for buying a home, then one of the first things you should have is the down payment. Below is an overview of this critical term.

What It Is

When buying a home via a mortgage, the financier doesn't loan you the entire money for the home purchase. Rather, you pay a small percentage of the purchase price and the financier pays the rest. The small percentage that you pay out of your pocket is the down payment. You can get it from your personal savings or family members or anywhere else other than the mortgage.

Why It Is Needed

You might think that the financier should loan you all the money if you are buying a home on a mortgage, but they have good reasons for not doing so. For one, the financier doesn't want to risk the entire cost of the house. The financier requires you to shoulder some of the risks so that they can minimize the losses in case you default on your mortgage.

Secondly, paying some money out of your own pocket shows your commitment or investment on the property. You are likely to take good care of the house if you also have some money on it than if you purchase it entirely with the financier's funds.

The Figures

The down payment is expressed as a percentage of the purchase price. The typical down payment is 20% of the purchase price of the house. Thus, for a $500,000 property, the usual down payment is $100,000. The 20% down payment is typical, but not a must — you may be able to pay lower or higher percentages. Both options have their pros and cons.

Pros and Cons of a High Down Payment

Below are some of the pros of a large down payment:

  • It may lower your interest rates
  • It lowers your monthly repayments
  • It increases your home equity
  • It strengthens your borrowing power
  • It may excuse you from buying private mortgage insurance (PMI)

On the other hand, a large down payment is bad because:

  • It interferes with your cash liquidity
  • You have to save for a long time to raise a significant amount

Neither a large or down payment is an outright winner. It all depends on your financial circumstances and personal preferences.

Get a good real estate agent to help you once you have the down payment in place. That way, you will be able to follow due process with the purchase and protect your investment. 

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5 February 2020

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