Home Loan Down Payment

By: EconomyWatch Content   Date: 15 December 2009

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Home loan down payment can be the most crucial factor for many individuals who are planning to buy a house. Some people prefer to accumulate at least 20% to 25% as down payment in order to save on interest rates. Some others prefer to purchase home loans in a sluggish economy without caring for down payment. However, this option is available only for selected individuals with good credit reports. In any of the cases, down payment economy forms a vicious circle. Detailed information and market analysis can help a borrower to spin this circle in a favorable direction.

 

What is Home Loan Down Payment?

Like other loan products, home loan down payment is the upfront payment made by the borrower to reserve a mortgage. It is a portion of the entire amount (usually 5% to 20%) and is mostly rendered in cash.

 

The purpose of the down payment is two fold:

 

  • It establishes the repayment ability of the borrower.
  • It reduces the loan amount to some extent thereby, reducing the risk for lender against possible payment default.

 

The term ‘down payment economy’ is used for a financial equation where down payment decides the rate of interest on a loan. If the down payment is below a set threshold, the borrower has to pay higher interest rates and vice versa. Moreover, down payment also affects how much loan amount can be granted to a borrower. Low down payment is considered as an indicator of a borrower’s poor financial health. Therefore, a lender does not want to invite risk by advancing a huge amount as loan to the borrower.

 

Home Loan Down Payment: Available Options

With increasing flexibility in the financial sector, a range of home loan down payment options is available to minimize potential effect on the interest rates. Popular options include:

 

  • Private mortgage insurance: The borrower purchases a commercial mortgage insurance policy. If the borrower defaults, the insurance company pays to the lender. Some lenders allow a borrower to end insurance policy, once 20% to 25% of the loan amount is repaid.
  • Government-approved loans: These loans are insured by government agencies. They are low-interest rate loans spanning low to moderate earning individuals.

 

Many countries have special home loan down payment policies to target rural population and veterans.


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