If you have decided to take a home loan to build a new home, buy from a builder’s project or renovation of the existing house, the first major thing to consider is capital for the down payment and impact on your loan amount, EMIs, etc.
Borrowers can pay down payments lower or higher end according to their convenience and budget. There is a unique significance of both, and we will discuss it through various aspects in the passage.
We will start with the meaning of down payment and continue with the significance of both options for home loan applications. Consider the advantages of lower and higher down payments for further proceeding with home loan applications.
Down payment is applicable on anything that is expensive and can be paid in equated monthly instalments. About home loans, lending institutions fix a certain percentage of the property’s value as a loan. The difference between the amount that lenders approve and the actual price of the property is a down payment.
Borrowers need to pay this balance amount before loan disbursal. Financial experts have divided thoughts between lower and higher down payments. So, we will analyse both options and their benefits for your consideration.
The point to consider is amount of down payment, your financial status, budget, and future financial liabilities.
Significance of Down Payment
Significance of Large Down Payments
- A higher down payment means you are paying a significant portion of the loan amount beforehand. Higher down payment causes a substantial decrease in the loan amount. A lower loan amount is comparatively easier to repay and adjust from the existing source of income. You would not have any additional financial burden to arrange for the higher loan amount.
- Higher down payment significantly affects equated monthly instalments. Suppose you paid 40 per cent of the property value, only 60 per cent property value to be funded through a home loan. Your EMI amount will be lower because you have already paid a substantial amount in advance.
- With lower EMI, you can comfortably manage your loan with a monthly income.
- The total amount of EMIs will decrease, and you end up paying less amount.
- Banks and loan distributors prefer people who pay the higher down payment. Higher upfront payment means the borrower saves and invest wisely. The person is trustworthy for timely repayment of the home loan EMIs. It also indicates the borrower has a good amount of capital from a reliable source of income.
- These considerations are essential because your creditworthiness for lenders decide your approval and sanction amount. Borrowers can apply with a higher down payment and proof of income even with a poor credit score.
- Another significant point is you can pay off home loans faster with the lower loan amount, EMIs, and loan tenure (preferably because you are paying less).
- Some Financial experts opine that large down payments are not desirable because a large amount of capital gets tied up with financial institutions. You cannot use it for any other purposes.
Significance of Low-Down Payment
There are certain situations when you should pay the smaller amount as a down payment for home loans.
- Though a higher down payment is desirable, it is not mandatory. There might be sufficient capital in your account at the time of the home loan application but irregular monthly income. In that case, you should not go for higher spend on down payment.
- Spend reasonably if your career is not going well because a home loan is a commitment for twenty to thirty years. Pay a small amount as a down payment and plan long-term expenses through smart financial planning.
- The same situation can be seen in reverse order. You have a nice job or business but have not done much saving. Your portfolio is unorganised or at a very beginning phase, etc. Whatever be the reason for not much saving, spend little on down payment and plan EMIs for the long-term.
- So small down payment helps in avoiding financial surprises and smoothens the process of the home loan tenure. Understanding the significance of small payments is vital because you are the one who will pay the loan amount, so your financial status is paramount for deciding lower or higher down payment.
- The money remains in your account, not with some real estate group or financial lenders.
Contact your lender and ask them about options for down payments during a home loan application.
Women, Home loans, and down payment
Even in 2021, Indian males take all the important decisions at home including Home Loans. To bring social liberty and justice, several State Governments and the Union Government of India have brought offers, tax benefits, etc to encourage women counterparts to participate in the financial decision-making process of the household.
Benefits provided by Lenders for Women Borrowers in India
- Some of the leading financial institutions offer a concession of 0.5 to 1 per cent on home loans interest rates.
- Property registered in the name of the women receives a concession on stamp duty
- Tax benefits under sections 80EEA, 24B, and 80C.
- The government has made it mandatory to include one women member of the family in the PMAY application for a home loan.
These benefits will encourage women to take home loans. They will have more savings for a down payment and faster loan repayment.
Consider down payment according to your financial situation and responsibilities. Never decide on the amount just for others’ sake. A home loan is a commitment of twenty to thirty years. Refer to the passage, assess the significance of lower and higher down payments according to your financial condition, and make the final decision to move ahead with the home loan application process.