Down Payment as a Way to Make Your Payments More Affordable
A down payment is required by banks when borrowers apply for a loan to finance the purchase of an expensive item, whether house or plant, vehicle, or machinery or equipment. It is usually a percentage of the price of the property, e.g. 5 – 20 percent. The amount put down is typically non refundable if the deal doesn’t go through. The remaining amount (70 to 95 percent of the purchase price) is funded by a credit union, bank, or another financial establishment in the form of a secured loan or mortgage.
Amount Required and PMI
While the amount required varies from bank to bank, it also depends on the type of loan. The payment varies between 3 and 13 percent when buying a vehicle. Borrowers who apply for a mortgage loan and put down less than 20 percent should purchase private mortgage insurance. The purpose is to protect the financial institution in case the borrower defaults. There are some downsides to PMI, and the main ones are that it is difficult to cancel and is expensive. While you are not required to pay premiums when your equity reaches 20 percent, you should send a letter to the insurer to request cancellation. A formal appraisal of the property may be required as well. Thus, it can take weeks and months before the mortgage insurance is canceled. Moreover, the policy is expensive. The PMI costs between 0.5 percent and 1 percent of the amount of the loan. It is paid annually. For example, if you apply for a $150,000 mortgage loan, you will be paying between $750 and $1,500 a year or $62.5 and $125 a month.
Alternatives to Consider
There are different mortgage loans and the down payment varies. Some financial institutions offer zero-down mortgages. Others accept 25 to 30 percent down and offer different perks. The financial institution may offer an attractive interest rate or overlook blemishes on the borrower’s credit record. Income verification may not be required. Putting more down allows applicants to avoid PMI, repay their loan within a shorter period, and afford a more expensive property. A lower monthly payment is an additional benefit. The affordable price also depends on whether you put 5, 10, or 20 percent down. The lower the interest rate, the more expensive house you can buy. How much you can borrow also depends on your gross annual income. Up to 32 percent of your income can be used for heating, property taxes, and interest and principal payments. Your debt load, including credit cards, personal and auto loans, and mortgage payments, cannot exceed 40 percent of your income.
As a rule, a large down payment reduces the amount that goes toward your principal payments and interest charges, as well as the total amount paid in interest charges over the term of the loan. This means that you will save a lot of money.
Finding Money for the Down Payment
There are different sources to consider, including money in your savings or money market account. You can also ask your family or friends for a loan. One option is to sell miscellaneous assets that you don’t need any longer. Or you can sell your new car, buy a used or less expensive car and use the difference. Alternatively, you can sell taxable investments such as bonds, mutual funds, stocks, and others or use money in your individual retirement account. You may face hefty penalties, however. Your life insurance is also an option. Some state and local governments, universities, colleges, and companies offer down payment assistance to employees and students. There are state-sponsored programs that offer low-interest loans to cover the down payment or closing costs. Finally, you may want to enlist your partner or spouse as a co-owner who will share the costs. Another option is to ask a family member of friend to co-sign (become your guarantor).
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