House Down Payment and its Types: A Concise Guide

Purchasing a house is not about driving on a Sunday afternoon, visiting random open houses that fall on your way, and finalizing a deal with the owner. Rather, it is about putting your finances in order and ensuring you have enough down payment. In the case of people looking for VA approved lenders, or seeking a USDA home loan program, the scene is different--no down payment. There are others, however, who depend on conventional and other loans when it comes to mortgaging a house. This article focuses on downpayment and how much of it you may need while buying your new house.

Understanding Down Payment
Anything that goes out of your pocket, which you do not or are unable to finance as a loan is your down payment. It is important to not confuse this amount with earnest money deposit or EMD, which most starters do. The reason, earnest money deposit is the amount required to secure your home’s purchase contract. It is only a part of your down payment that reflects your good intentions towards mortgage. Consequently, this amount is, usually, at risk when you default your payment.

Exploring Down Payment Types
How much downpayment you are required to pay to your lender depends on the type of your mortgage loan. These days, 80/20 combo loans and liar loans are hard to find, as lenders are more focused on closely scrutinizing your borrowing ability before landing into a deal. To be in a safer position, they want you to pay a good amount of down payment. Still many minimum down payment options exist:

VA Loans Down Payment
Designed for American veterans to help their dream of owning a house, va loans give you the option of zero down payment. The rate of interest is lower than conventional loans, but there is a funding fee involved that varies from 2.5 to 3.3%.

FHA Loan Down payment
Most conventional loans come with a fixed-rate mortgage, meaning your monthly payment or installment remains fixed and does not change as per the rate of interest. Though lenders do not finance 100% of your house loan, a good FICO score may get you a loan for up to 95% of house’s value.

Conventional Loan Down payment
A part of the American mortgage system since 1934, FHA loans, usually, carry a down payment of 3.5%. They may also accompany a mortgage insurance premium into the loan.

Things to Remember:

• Most lenders do not offer 100% financing, as they want borrowers to have some skin in the contract
• Home buyers have to bear other out-of-pocket expenses apart from down payment such as closing costs
• Closing costs are fees charged by lenders and third parties at the time of closing mortgage
• In most cases, buyers have to pay for closing costs, except a few such as VA loans where the lenders bear a portion of it

Conclusion
Going the conventional way, it is always better to pay as much down payment as you can. However, do not do the mistake of wiping out your savings account completely, and save some for the rainy days too. If you do not understand the intricacies of any mortgage type or do not have time to do so, better take the help of a loan officer. Tied to banks, credit unions and other financial institutions, loan officers have both the expertise and knowledge to help you choose the right mortgage plan that works best for you and your family.

Are You Paying Too much For Your Mortgage?

An amortization schedule, though one of the most important documents in a mortgage process, is still the most overlooked. Rarely do home loan or mortgage applicants take the time to speak with their bankers or their loan advisors to understand what an amortization schedule is and how it helps.

The word ‘Amortization’ is an accounting term that refers to the amount of principal and interest paid during the loan term.  The amortization schedule gives information about the number of installments paid, the breakup of the principal and interest paid, the principal paid and the balance outstanding. 

The Example

In order to understand this better let us take up an example.

Suppose you took a home where

Loan Amount - $10,00,000

Interest Rate – 12%

Term Period – 1 Year

And let’s say the banker tells you that this is how you are supposed to repay your loan

Number of Installments – 12

Monthly Installment - $88,849

The banker also gives you an amortization schedule that would look like this. 

The Amortization Schedule

No of Installments Paid	Installment Paid (A+B)	Principal Paid (A)	Interest Paid (B)	Principal Outstanding	% Principal Outstanding
1	$88,849	$78,849	$10,000	$9,21,151	7.88%
2	$88,849	$79,637	$9,212	$8,41,514	15.85%
3	$88,849	$80,434	$8,415	$7,61,080	23.89%
4	$88,849	$81,238	$7,611	$6,79,842	32.02%
5	$88,849	$82,050	$6,798	$5,97,792	40.22%
6	$88,849	$82,871	$5,978	$5,14,921	48.51%
7	$88,849	$83,700	$5,149	$4,31,221	56.88%
8	$88,849	$84,537	$4,312	$3,46,685	65.33%
9	$88,849	$85,382	$3,467	$2,61,303	73.87%
10	$88,849	$86,236	$2,613	$1,75,067	82.49%
11	$88,849	$87,098	$1,751	$87,969	91.20%
12	$88,849	$87,969	$880	$0	100

Understanding the Amortization Schedule 

After looking at this self-explanatory amortization schedule a question that might come up in your mind is that how is the Principal Paid(A) and the Interest(B) calculated.

To calculate the Interest we need to apply the following formula

Interest = (Principal*Rate*Time)/100

Principal = Principal Outstanding after paying last one’s installment

Rate = 12% (on an yearly basis)

Time = 1 month = 1/12 year

You will see that the rate and time will remain the same whereas the principal will change month on month 

1^st Installment

Interest = 10,00,000*12*(1/12)/100 = 10,000

Principal Paid = = $88,849 - $10,000 = $78,849

Principal Outstanding = $10,00,000 - $78,849 = $9,21,151

*Remember: This month’s outstanding principal will be next month’s principal

2^nd Installment

Interest = $9,21,151*12*(1/12)/100 = $9211.51

**For the sake of simplicity let us round it off and now the Interest is $9212

Principal Paid = Installment Paid – Interest Paid = $88,849 - $9212 = $79637

Principal Outstanding = $9,21,151 - $79637 = $841514

This is how you would go on calculating the interest paid for each month and also the principal outstanding.

At the end of 12 months you would see that Principal outstanding becomes 0 and you may then add up all the interest amounts paid to get the exact value of the total interest paid.

In this case the total interest paid comes out to $66,186

Word of advice

Whenever you take a mortgage loan do ask the lender to provide you the amortization schedule. This will not only tell you the exact interest amount you are paying on your loan but it would also help you to know the exact principal outstanding at any point in time during the loan period, in case you are planning to pre-close your loan.