Term Of The Day: Down Payment

Down payment is the payment you make upfront while you buy a home. The rest of the payment is often financed by a mortgage loan. But, broadly, down payment is the initial payment you make in cash while purchasing any good. 

PropGuide Explains Down Payment

When you apply for a mortgage loan, banks and financial institutions typically insist on making a down payment of  20% primarily because of two reasons. 1) Banks are expected to meet the minimum capital requirement to create money in the fractional reserve banking system. 2) If you default on the equated monthly installment (EMI) payment, lenders can recover a substantial fraction of the money you owe them. 

While purchasing an apartment, people make an initial down payment and structure the rest of the payment in the form of equated monthly installments. After you make the down payment, you get the balance from a bank or financial institution in the form of mortgage. This is because an apartment is an expensive asset that would not be otherwise affordable to most people. The down payment is made to reduce your obligation. 

According to reasonable estimates, your credibility is low if the down payment is lower than 20% of the value of your home. If you make a greater down payment, your equated monthly installment would be lower. The payment you make toward your home over the loan tenure period would be lower too. Moreover, the equity your home represents would be greater. Banks would not insist on you having mortgage insurance if your down payment is high. Certain banks and financial institutions also charge a lower interest rate when the down payment is higher. 

Check out PropGuide's comprehensive guide to real estate terms here.

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