| Click on our Advertisement |
|
|
We have discussed previously the effects of down payment on the interest rate of secured personal loans and commercial loans. Therefore, you are probably acquainted with the benefits of making a down payment when taking a loan. However, doing so also implies a sacrifice and it is advisable to find a balance so as to avoid overpaying but still seizing the benefits of putting some money down. In this article, we intend to provide you with a brief explanation on the basics of down payment assessment.
The Need For Down Payment
As explained on other articles, a down payment is not strictly necessary for most lenders. There are home loan offers that require no money down which are usually advertized with phrases like: 100% financing, whole purchase price, Zero money down or no down payment. However, those loans that lack this requirement usually charge a higher interest rate due to the higher risk involved in the transaction for the lender.
The higher the down payment, the lower the risk? Yes, and no. Up to some extent, the more money you put down on your property, the better the rate and terms on your home loan. But once you reach certain percentage of the property’s value, there are little to no variations and raising a higher amount may not be financially advisable. Actually, it may be so if you just want to pay off your debt sooner or borrow less. But other than that, you will not see your loan terms improved.
The target percentage of most lenders is 20% of the purchase price of the property. This implies that the lenders are willing to finance 80% of the transaction. However, most lenders will lend up to 100% or even more (if improvements need to be made on the property). These loans however require a better credit score to qualify for them. Those with bad credit or no credit will probably need to raise enough money for a down payment before applying or agree to a significantly higher interest rate if they want to get approved for a home loan financing more than 80% of the price of the property.
How Much Should I Put Down?
To assess the right amount that you should put down on your home loan you need to take into consideration several factors. For starters and as a general rule, you should pay as much as possible because that would save you thousands of dollars on interests. However, If you have outstanding consumer debt charging a higher interest rate than the rate charged on your home loan, you should use the money to cancel your debt first.
Also, you should take into account whether your property will increase in value or decrease. Currently, prices are dropping and they are already low but the situation is likely to change if not in the near future within a couple of years. You have to think about the down payment as an investment. The more money you put down the more revenues you will be obtaining if the price of the property increases.
|
