When looking for home loans, most of us carefully review what will be the interest rate offered, what could be the maximum loan amount one could avail and finally consider other features such as pre-closure, part payment and so on. But, what is often not thought through, but needs to be is the – down payment part of your home loan. Let us look at some of the vital aspects with respect to our topic for today.
What is Down payment?
Down payment is that amount which you will have put forth from your own resources, while purchasing a property.
Why Down payment?
You must be aware that, Financial Institutions provide no more than 80 to 85% of your property value while providing you Home Loan. Then, there is also the income criteria which will further bring down the borrowable amount.
The remaining 15 to 20% of the funding needs to be provided by the purchaser, since lending institutions believe that the buyer should also have certain stake in the property. And also, this lets the bank lend an amount that is always lower than the market value of the property.
What are the sources for my down payment?
Your sources could be from your own bank account or there are other sources you could consider as well:
- from your own savings
- by borrowing from friends / relatives
- by liquidating your assets
- by availing a gold loan or a personal loan
Which could be the best option ?
If you have set aside some part of your savings towards down payment for your home loan, ideally that would be the best way to pay for this. However, using up every penny of your savings for the same purpose is definitely not a good idea, as this will constrain you from meeting everyday expenses and also having an emergency fund incase you are faced with some uncertain situation such as a medical emergency.
An unsecured loan is also a good idea, if you feel that you don’t want to use too much of your savings. However, keep in mind the emis you will be required to pay every month once you also take up your home loan.
How much should I pay?
It would be preferable if you are able to pay the entire 20% of the value of your property, or even more, if possible.
Now, on to the most important question:
How does this affect my emi?
Let us understand how your emi differs based on how much you pay as your down payment:
If your property value is, say 50,00,000 [ 50 lakhs] @ 10.25% p.a for 15 years
Now, if you were to pay a down payment which is 25% of your property value, then
As you can see, the difference between the two emis is 2,725
Now, imagine paying that much extra on your home loan for 15 years! You will end up wasting close to 5 lakhs of your money. This is why, the higher you pay as part of your down payment, the more you will end up saving in terms of interest paid as well as principal.
Which is precisely why, it is necessary to keep up your savings on track at all times.