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Created on Thursday, 16 February 2012 00:23

Using Down Payment To Your Advantage

Mortgage down payments are a sure way by which mortgage lenders can ensure that their borrowers do not leave them empty handed when mortgage default becomes a serious problem that cannot be overcome by the borrower.

Since the downfall of the mortgage market, mortgage lenders have been instructed to demand down payments on almost all home loans.

However, quite a few mortgage companies continue to run ‘No Down payment’ loans.

Due to the fact that mortgage lenders are the ones always asking for borrowers to pay some percentage of the home loan as down payment before their request for a home loan is granted, many of us turn to think that down payments have been institutionalized only for the benefit of the mortgage lender.

For this reason, many of us are reluctant to pay the requested down payments and in situations where the lender offers the possibility of obtaining a ‘No Down payment’ loan, we jump at the opportunity without hesitation.

But down payments offer immense benefits to both the lender and the borrower. Imagine seeking a $200,000 home loan from a mortgage company that expects you to put down 20% of the amount.

Working 20% of $200,000 means that you would need to put aside $40,000. Looking at the current economic hardship and the continuous increase in unemployment figures, $40,000 is a whole lot of money. Many people would find it difficult to raise that amount of money without having to fall to friends, relatives or other loan institutions.

But imagine you are successful at acquiring such an amount as loan at a rate far lower than what your mortgage company is charging you or you are able to raise the funds from your savings. In this case, you have reduced your mortgage loan by $40,000. The lender would require that you make contributions towards settling the $160,000 loan you owe on the mortgage. So in effect, the 20% down payment you made has helped to reduce your principal amount even before you begin to make monthly contributions to the lender.

This means that the higher the percentage down payment you make on the loan, the lesser the amount of money you would owe the lender. If this is the case, why is down payment so unpopular amongst borrowers? This may be due to the fact that down payments have been tied to borrowers in poor financial standing and as such are not qualified for a home loan.

Across the mortgage market, mortgage lenders continue to charge high fees and demand high percentages on down payment for borrowers who, according to the Dodd Frank Financial Reform law, fall outside the acceptable limit required for low risk borrowers. High risk borrowers are expected to pay more as down payment whereas low risk borrowers may even enjoy no down payment loans.

Psychologically, people tend to think that putting down some amount of money before taking a home loan is something that should be associated with those who cannot be trusted to repay the loan (those with low credit scores).

A lot more people work on ways by which they can secure lower percentage down payment when they should be looking at how they can even pay more to ease their own credit burden.

On a larger scale, down payment makes money available to the lender so that more home loans could be given out to deserving individuals. The down payment collected from a given number of borrowers within a particular mortgage company will form a monetary pool from which more loans can be taken from.