Buying a house is an important decision that involves several factors that can impact your life. The first thing which you need to decide is how you are going to finance the purchase of your dream home. Whether you want to use your savings or you want to take a home loan. Well, the first option is limited only to a few as most of us don’t have much savings in our 30’s and 40’s which can buy us a home.
Home loans are way convenient and help you to purchase your dream home without any hassle. Though it is the most convenient way to finance your home purchase, still you need to pay some from your pocket even after availing the loan. This is the down payment for your home.
Funding Your Home Purchase
Make sure that you avoid liquidating your long-term investments in haste and at sub-optimal prices, so as to fund your home purchase. If you do so, you will be putting your financial future in jeopardy.
In fact, you can opt for a home loan. This way, you are not only able to buy a home early in life but it also leverages your future incomes. Hence, one of the optimal solutions of funding a home purchase would be by availing a home loan and repaying the amount according to the schedule set by your lender.
Down Payment Challenges
When availing a home loan, you need to personally fund a portion of the cost of the home, which is generally a minimum of 10% and varies from 10 to 30% with most of the lenders. This portion that you need to fund from your own pocket as the bank doesn’t provide the entire funding for your house. Hence, making a down payment is essential to be eligible for a home loan.
Benefits of making a higher down payment
you may get a lower interest rate
Reduces your principal amount
lower processing costs and insurance premiums
You get a larger home equity
Reduces your debt burden
After you decide to take a home loan, you may find yourself in a slightly difficult situation when it comes to the down payment. The price of the property is reaching the sky and arranging 20% to 30% of the total cost of it from your own is difficult for many of us. And if you decide to wait for some time so that you can save for the down payment, it is possible that the property price may increase again. So, it’s always better not to delay once you have made your mind.
To arrange for the downpayment you may need to set aside a few of your short term money goals and need to work on your money management skills more effectively. Although it seems tough to arrange lakhs of money still there are certain ways through which it can be made easier to fund your down payment.
Ways to arrange money for your home loan down payment
Use money from your savings
Seek proportionate release payments
You can borrow against your insurance policies including PPF and term insurance.
Borrowing from friends and family is also an option
Use money from your investments such as FDs
You can also take a personal loan of a small amount
Things to take care off while planning a higher down payment
Lower liquidity
Financial crunch during an emergency
Less returns
possible shortfall in funds for initial expenses such as home interiors
Go for a Loan against Your Life Insurance Policies or Provident Fund
Since your home is nothing but a long-term asset that appreciates in value over time, you might as well consider utilizing your long-term savings (in case you don’t have any other option).
By taking a loan against your life insurance policies or provident fund, you will be able to repay this loan amount over the time with your savings.
How much down payment is ideal to make?
Well, banks ask for a particular portion from the total cost of your house as the down payment. Still ranging from minimum to maximum it varies from 10 to 30% of the property cost. However, there are both pros and cons related to it. But the fact of the matter is you should make a down payment as per your affordability. Don’t rush to pay a high down payment by liquidating your investments and savings as this can backfire and you can face financial crunches in an emergency and fewer returns in the future. In case you are not able to arrange funds, you can bargain with your lender and ask him to reduce the down payment percentage. An ideal amount can also be set by the help of a home loan EMI calculator. The home loan EMI calculator is an easy virtual tool and can be found on the website of any financial firm.
Pros and Cons of Large Down Payment
Pros:
Since you own larger equity in the property, it thus lowers your dependence on the borrowed funds.
Seeking a low loan amount means you will pay a low-interest rate. For instance, the interest rate for Rs.20 lakh loan amount is comparatively lower than that for Rs.30 lakh loan amount. However, this depends on your lender’s policies.
With a lower loan amount, the chances of your loan application getting approved are high.
All this eventually leads to cost savings, as the processing fees and home loan insurance premiums depend on your loan amount.
Cons:
Chances are that your own funds might get locked up for the long term. This may result in lower liquidity for you and would, in turn, lead to a financial crunch during an emergency.
Home loan repayments provide you with tax benefits, both on the principal as well as interest component. Having to pay a lower loan would mean lower tax benefits.
To Conclude
A home loan is essential while buying your dream home. Choose a Home Loan which have no hidden charges and is designed to meet your specific requirements.
