When you obtain a mortgage to purchase a home, you are expected to pay a part of the total purchasing sum from your pocket, basically known as down payment. The lending institution requires you to pay the amount to be sure of your financial credibility. The size of the amount you pay has a direct effect on your home loan, in addition to your finances, some of which are mentioned below.
Approval of loan
Apart from having a good credit score, borrowers are expected to pay higher funds towards their down payment to secure easy approval of mortgage. As the sum plays a major role in determining the financial condition of the borrower, higher amount means fast and hassle free approval of home loan. While individuals with good credit rating can quality for a loan even with relatively low down payment, the same cannot be expected by those with poor credit score. This is because lenders compensate for the risk of lending funds to bad credit borrowers by expecting them to put down larger sum of money.
Loan limit and cost
The first installment of the loan influences the cost of mortgage. The bigger the sum, the smaller is the loan amount and so is the cost of loan. Since the interest is calculated on the total loan borrowed, smaller loan means lower interest. It means by paying more towards your initial installment, you can save big in future, especially with a bigger loan term. Thus, consider of paying higher sum if you want to generate more savings.
With smaller total loan and lower interest payments, the total size of the monthly installments, which are necessary to be paid on time, is also small. Making the mortgage more affordable, it offers great financial freedom to the borrower. You would be capable of saving more for important things like education of your children and emergency needs. Moreover, as the loan amount is small, it can be paid off quickly, without defaulting on the loan even in case of any financial crisis.
By putting down bigger amount of money, one can have better chances of qualifying for refinancing. Paying higher sum, you are able to build greater equity value in your home. The larger your home equity value, more easy it becomes for you to secure approval for refinancing. In fact, you can also expect additional benefits of obtaining lower interest rates and monthly installments.
When you buy a house, you are expected to obtain mortgage insurance. However, loan borrowers who make down payment of more than 20% of the market value of the home can enjoy the benefit of being exempted from mortgage insurance. By not having to pay for insurance and monthly premiums, you can save a big amount in the long run.
To sum up, the bigger the down payment, the better it is. You can not only enjoy lower interest rates but are also at a lower risk of defaulting on loan, thus maintaining a good credit score which can help a lot in future by offering easy qualification for any other loan.
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