When you are about to purchase expensive assets such as a home, you are required to pay a specific portion of the cost in the form of an initial payment – downpayment. This advance payment will have a significant impact on the EMIs you need to pay throughout the life of your home loan. Hence, it is crucial to understand how downpayments work.
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What is Downpayment?
The upfront payment you make at the time of purchasing a home, vehicle, or any other asset is known as a downpayment. Meaning, it is the portion of the cost that you pay to the seller in advance and out of your own pockets (as opposed to borrowing). Hence, a home downpayment is not paid via home loans but through personal savings – cheque, debit card, etc.
How Much Should You Pay as Downpayment?
Though “zero down” options are available wherein you do not need to pay downpayments, it is always wise to do so, especially if you have ready funds. Now, the question that arises is how much you should pay as downpayment. Some people believe larger downpayments are better; however, some others prefer smaller downpayments.
The amount of money you should pay as downpayment will be influenced the following factors –
Home Loan Interest Rates
A home downpayment usually covers a meaningful percentage of money. As a result, opting for a higher downpayment will help you avail lower home loan interest rates as naturally, the home loan amount will drop down once the downpayment has been made. So, if you want to pay lower home loan interest, you should reduce lender risk by paying a higher downpayment.
Monthly Repayment Capacity
Do you feel that your current salary status could decline in the future? Then, it is better to opt for a larger downpayment now when your income is high. This will reduce your monthly EMIs. However, even if that is not the case, you must ensure that other financial commitments do not get disturbed due to home loan EMIs. For this, you can use a simple, online home loan calculator such as the home loan EMI calculator.
Emergency Reserves
Now, you could be having sufficient funds to make a high downpayment; however, if you have been saving all that money for emergency situations such as medical expenses, college fees, etc., opt for a smaller downpayment. But, do remember that a smaller downpayment would naturally mean higher home loan interest rates and subsequently, higher home loan EMIs.
Tips for Making a Home Downpayment
You can gather enough funds for a decent downpayment in the following ways –
- Build your saving corpus
- Take a loan against your insurance policies or PPF
- Borrow funds from family and friends
Both higher and lower downpayment has its pros and cons. It is vital that you check your home loan eligibility and home loan EMIs before you jump into deciding about the downpayment amount. This is to ensure the smooth planning of your home loan repayment.
