Throughout your house-buying procedure, one term that you are going to hear multiple times is a down payment. Not many people are familiar with this term and how it works.
So, what is a down payment and why is it important when it comes to buying a new house? Let’s find out.
What is a Down Payment?
A down payment is a non-refundable payment that is made upfront for buying a high-priced thing – like a house or a car. After the initial payment, the rest of the payment is made by getting a loan from a bank or any other financial institution. Since the customer pays a portion of the needed required payment upfront, it provides the lending or financial institution with a sense of security.
Importantly, a down payment is mainly used during real estate purchases. While buying a house, the buyer is supposed to pay 5-20% of the total value of the buying price. The rest of the balance is paid by the bank or a financial institution, which is referred to as a mortgage. Apart from house purchases, a down payment is also a common thing in car purchases.
How to Obtain a Good Down Payment
Here are some effective ways to obtain a good down payment as a home buyer:
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Get a tax-free savings account
A tax-free savings account can help you save a good amount of money. You can use the money later for paying the down payment.
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Make systematic savings
If you are planning to buy a new house, you have to be watchful of your spending and save systematically. By saving a certain amount of money every month, you can accumulate a significant amount to be paid as a down payment later on.
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Borrow from friends or family
If you think you won’t be able to manage to pay for a down payment. You can consider borrowing some amount from your friends or family members. This way, you can also pay a relatively higher down payment.
Moreover, this will also help you secure a smaller interest rate, which will further allow you to not pay for mortgage insurance.
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Be a part of a first-time home purchaser’s program
A first-time home purchaser’s program allows the home buyers to get a percentage of the buying price of the house to put towards a down payment.
How Down Payment is Different Than Closing Costs
Surely, there would be several hands in the pot during the time of real estate transactions. When it’s the time of closing, all of the hands would want to get the money for the services they provided during the home-buying process.
At times, you can have the closing costs included in the loan, which is also referred to as “cash due at closing.” Additionally, some home buyers also tend to convince the seller to pay a few or all of the costs for them. It is also important to know that the buyer and seller will have to pay their closing costs.
