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Home ownership has a strong emotional appeal for the vast majority of people. Because of the economic analysis of home buying, it is both a major financial decision and a financial accomplishment. It is due to the high property prices. Mortgages increase your purchasing power. However, no home loan can cover the entire cost of your home. You must have the margin money – your home loan down payment – on hand.
Lending institutions will typically finance up to 80% of the value of your sale agreement. Some lenders will go up to 90% if the agreement value is very low. The rest – your down payment – needs to be arranged by you. The down payment assures the lending institution that you have a stake in the property and intend to repay your loan.
What is Home Loan Down Payment?
A home loan down payment is the lump sum upfront payment made by a borrower to the lending institution (banking or non-banking financial institution offering a home loan). According to RBI rules, lending institutions in India can provide a maximum of 80% of the value of the concerned property as a home loan, with the borrower responsible for arranging the remaining 20% on their own.
Home Loan Down Payment Features and Benefits
Here are the characteristics and advantages of a home loan down payment.
Lower interest rates: If you make a minimum down payment on a home loan, you will get a low interest rate. This significantly reduces the EMI and total interest payable.
Builds trust between borrower and lender: When you pay the down payment on a home loan, it comforts the lender and makes them trust you more. The down payment on a home loan lowers the risk and increases the likelihood of repayment.
Long loan tenure: If you pay your down payment on time for your home loan, you will be able to get a longer loan tenure from the lender.
Lower processing costs: Lenders will be willing to provide lower processing charges if you pay a good amount as down payment to buy a house.
Easy Approval: Making a down payment shows that you have a higher chance of making payments, which leads to an easy home loan approval.
However, the strategies shared below can greatly assist you in planning your home’s down payment in advance:
Start Saving from early age
When you’ve decided to buy a house, your first step should be to determine your desired price range. On that basis, you can calculate the down payment needed and then work toward accumulating it. Set a goal to save this amount, breaking it down into monthly contributions you can deduct from your paycheck. The following is a list of the best places to find a copy of the book. This will multiply your savings and provide you with enough funds to make the down payment on your home loan.
Take help from friends and family
When the moment of purchase arrives, it’s possible your savings may be falling a little short. You can consider taking a soft loan to arrange for the down payment. You can borrow money for the down payment from friends, family, and siblings at an agreed-upon interest rate and repayment terms. But keep in mind that borrowing money from friends and family can be a double-edged sword, as it can solve your financial problem but harm your relationship if you aren’t careful about repayment. Before borrowing, be certain of your decision and work out a repayment plan.
Asset & Investment liquidation
Down payments can be made by selling assets such as an old bike, a plot of land, or another piece of property that you own. You can also liquidate your investments like fixed deposits, mutual funds, PPF etc. Just make sure you’re financially secure for the time being if this is your only source of income for the foreseeable future.
Budget Planning
The costs of purchasing a home can often be prohibitively expensive. The term “electronic commerce” refers to the sale of electronic goods. This will free up more of your savings. Purchasing a ready-to-move property rather than an under-construction property, for example, will save you GST. Co-owning the property with a woman (your wife or mother) may allow you to get lower registration fees and interest rates on home loans. Furnishing your home in a phased manner instead of going all-in at the beginning could also ease your finances. Finally, if your savings do not allow you to purchase a specific house, look for another house that fits your budget.
Loan Against Investments
Borrowing funds against long-term investments such as insurance policies or provident funds is another option for covering lump-sum payments. This loan can be repaid over some time using personal savings. You could also consider liquidating or mortgaging your assets, such as an old car, mutual funds, shares, jewellery, and so on.
Take an unsecured loan:
If you don’t have enough money to pay the remaining balance, you can always seek unsecured loans from a bank or lender. For instance, if the value of your property is Rs.30 lakh and you have already managed to get a home loan of Rs.27 lakh, the remaining Rs.3 lakh can be paid by taking another loan. If you have a good credit history, you may be able to get lower interest rates on your personal loan.
Pull up funds from your investments:
A well-diversified investment portfolio can benefit you in a variety of ways. Investing your money will not only help secure your future, but it will also help you get through difficult financial times. You can, for example, use fixed deposits or mutual funds as collateral to secure a low-interest loan. That way, you’ll be able to plan your finances for the down payment. Furthermore, the pressure of repaying the loan will be reduced because secured loans have lower interest rates than unsecured loans.
Advantages of Home Loan Down Payment:
- When you pay a larger down payment, the rest of the loan amount will be lower. Hence, this may fetch you a lower interest rate depending on the lender’s policies.
- A larger down payment ensures that you own more equity in the property, reducing your reliance on borrowed funds.
- The lenders will be comfortable with higher down payments due to decreased risk elements. As a result, it increases the likelihood of a faster loan approval.
- Because lenders offer cost savings on processing fees and home loan insurance premiums, making a large down payment will help you save even more money.
Disadvantages:
- Because your funds will be locked up for an extended period of time, the likelihood of financial problems during an emergency is high. As a result, liquidity will be reduced.
- Your loan amount will be reduced if you make a large down payment. This will result in lower home loan repayment tax benefits on both the principal and interest components.
- The term “responsibility” refers to the act of determining whether or not a person is responsible for his or her own actions.
Conclusion:
It goes without saying that putting down more money will result in better home loan terms and interest rates. As a result, if properly planned, a home loan down payment can be an important tool in obtaining a much more affordable and practical home loan. The key word here, of course, is planning.
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