Buying a home is an aspiration of many. The home-buying process is complicated and needs extensive research and planning. From finding a dream house to applying for a home loan, it is a 24/7 experience that involves a lot of thought and prudent decision-making. As far as funding is concerned, numerous lending institutions are ready with lucrative home loan offers. However, they fund 70-90% of the property’s cost, and the homebuyer has to arrange for the remaining amount with a down payment.
Confused about how to plan for a down payment for a home loan? As a homebuyer, saving some amount for the down payment is necessary. Here is some crucial information an aspiring borrower must have to save up for the down payment.
What is a Home Loan Down Payment?
A borrower pays a down payment upfront while taking a loan to buy a house. It is a percentage of the property’s total cost to represent its ownership and the homebuyer’s initial stake. The buyer usually pays the down payment from pocket and takes a loan from a lender to fund the remaining balance. Then, they pay monthly EMIs on the principal and interest amount. The property deed becomes clear once the borrower pays off the loan.
Calculating the Down Payment
Usually, the lending institution funds 70-90% of the property’s cost, and the borrower has to pay the remaining amount as a down payment. Therefore, the amount of down payment depends on the property’s price and the eligible LTV ratio. Individuals with a high credit rating often qualify for a bigger loan, saving them from making a substantial down payment. A House Loan EMI Calculator helps calculate the monthly EMIs and plan the loan term according to the budget.
To calculate the down payment, determine the property’s cost and the percentage you can afford to pay upfront. Then, multiply the price by the percentage to know the down payment. Here is the formula:
Down Payment = Property’s Cost x Percentage of Down Payment
Don’t forget to assign some money for other expenses, like origination fees, insurance, and closing costs. The charges may vary between lenders but keep around 3% of the property’s price for these expenses.
Benefits of Making a Bigger Down Payment
While funding most of the property’s cost with a loan sounds tempting, it often increases the loan burden and makes repayment more challenging. That is why making the maximum possible down payment is better. Making a bigger down payment for home loan helps save money in the long run and brings several other benefits, including:
- Instantly get more equity in the property
- Monthly EMIs become smaller
- Qualification for a lower interest rate
- Fewer fees charged
- Reduced PMI charges
Tips to Save Money for a Down Payment for Home Loan
Set Goals: Calculate the down payment to be made using the formula mentioned above. It will help get a picture of how much to save and concentrate on achieving the target amount.
Begin Early: Starting to save money as soon as the earnings begin is the first step towards a financially secure future. Those who have just started their career must save at least a small percentage of their income each month. Even if it is not a considerable amount, it may make up a decent down payment when the time comes to purchase a house.
Additional income: Can you earn more money by working on weekends? Be ready to work harder for additional income. If purchasing a property on standard income is challenging, increasing the earnings is vital.
Sell Old Stuff: Do you have old belongings that are no longer useful but can fetch a good sum? Several platforms deal in second-hand goods. Look around and grab such items and sell them to earn some money. Although it may not be a huge sum, it may bring some cash worth adding to the down payment.
Make Lifestyle Changes: Do you spend more on partying, eating out, movies, and other lifestyle expenses? Cut back on such non-essential costs and save that amount to make a down payment. Budget-friendly lifestyle changes like cooking at home, traveling on public transport, downloading a movie online, etc., can help a significant sum each month.
Give a Break to Credit Card Usage: Credit card is easy money that encourages an individual to spend more. While planning to save for a down payment, avoid credit card usage and rely on cash for most of the expenses.
Open a Separate Account: Open a separate account exclusively for the down payment and automate savings in this account. Keeping it separate will save money even when you are tight on cash.
So, once you save enough for the down payment for a home loan, approach a lender like Grihashakti that offers efficient, hassle-free, and reliable funding options. Start saving for your first or second home purchase now using the tips mentioned above and make that dream house yours.