One of the alternatives for payment that real estate developers in the Philippines provide to homebuyers is a spot cash down payment. The down payment ranges from 10% to 20% of the total cost of the item. A couple prospective purchasers who couldn’t immediately come up with the entire down payment strike an agreement for half spot cash and half evenly divided down payment. Following payment of the reservation fee, the homebuyer will contribute half of the required total down payment. Purchasers opt for this course of action to lower their monthly down payment.
What is the Advantage of Spot Down payment?
Being able to afford a down payment and closing costs is the largest challenge for first-time buyers. Therefore, wouldn’t it make sense to reduce the down payment as much as possible in order to minimize this barrier?
Perhaps, but making a spot down payment has a number of advantages as well.
Here are 6 advantages of putting down a 20% or higher deposit on a home.
- Less balance on the mortgage.
A bigger down payment results in a smaller initial loan balance, which offers a few benefits. One of these benefits is that, even if house market values decrease, there will still be a cushion of home equity. That can determine whether you can refinance or sell your house in the future.
- Reduced mortgage rates
The loan-to-value (LTV) ratio is one metric used by mortgage lenders to evaluate risk. The lower your down payment, the greater your LTV ratio and, in the perspective of lenders, the riskier your loan is. You may be able to get a cheaper interest rate if you lower your loan’s LTV ratio with a larger down payment because lenders often charge higher interest rates to make riskier loans.
- Lower interest costs.
The aforementioned two advantages of a bigger down payment—smaller loan amounts and lower mortgage rates—combine to minimize the overall interest you pay over the course of a loan. You may use a mortgage calculator to see how much interest you would have to pay overall and determine how much money you would ultimately save by making a smaller down payment.
$50k additional upfront is due. An extra $50,000 must be paid up front when increasing the down payment on a $500,000 loan from 10% to 20%.
Long-term savings of more than $96,000. With a bigger down payment, a 5 percent, 30-year mortgage costs $96,627.89 less overall thanks to $50,000 less in principle repayment and a total of $46,627.89 less interest.
- Reduced premiums for private mortgage insurance.
Mortgage insurance protects against the possibility of loan default by borrowers. The quantity of your down payment can have an impact on the amount of mortgage insurance you must pay, how long you must pay it for, and the size of your premiums because this risk is higher for mortgage loans with higher LTV ratios.
- Easier to manage monthly payments.
Lowering your loan balance, mortgage rate, and mortgage insurance premium are a few of the aforementioned elements that might affect how much you spend each month. The ability to see how much less of a burden your monthly payments will be if you start off with a greater down payment is another useful feature of a mortgage calculator.
- Positive experience with budgeting.
Although saving for a down payment can be difficult, doing so will provide you the opportunity to develop the financial discipline necessary to make your regular mortgage payments. Too many home buyers discover how much of a financial strain they are only after starting to make those monthly mortgage payments. Consider putting money aside for a down payment as a test to determine how much room there is in your mortgage.
Disadvantages of a spot down payment
There are several reasons to think about making a large down payment, but there are also four potential downsides you should be aware of.
- Greater delay in entering the market.
Your chances of becoming a homeowner may be delayed by the months or years you spend saving for a larger down payment. This entails paying rent for that additional period of time, which could result in prices escalating if housing costs in your location are increasing quickly.
2. Little freedom in the near term.
Cutting back on funds to boost your down payment could be a mistake because purchasing a new house frequently involves facing unforeseen costs. A lower down payment might enable you to keep your emergency fund intact, pay off high-interest debt, or use the money for other purposes. Making a lesser down payment, however, shouldn’t be used as a strategy to purchase a home that you cannot afford.
3. Interference with saving for retirement or investing.
A down payment might deplete funds that would otherwise be used for other purposes. For instance, setting aside money for a home may limit your retirement or education savings, or you may need to sell certain long-term investments to pay for a down payment. When weighing the advantages of a sizable down payment, you should also consider the opportunity cost of taking that money away from other uses.
4. Benefits take time to accumulate.
Many of the advantages of a substantial down payment are long-term rather than short-term in nature, which may not be of much help to you if you don’t intend to live in the home for an extended period of time.
The advantages and disadvantage of spot down payment depend on a variety of elements, including the real estate market in your area, your financial status, and your long-term objectives.
4 methods for raising a down payment on a home
You have the following choices for increasing the required down payment:
- Personal loan for a home down payment.
There are a number of issues with taking out a personal loan in addition to your mortgage in order to make a down payment. Borrowing for a down payment is prohibited by some mortgage programs, and if you do, it will probably have an adverse effect on your debt-to-income ratio and credit score. They play a significant role in determining if you are eligible for a mortgage loan and, if so, what interest rate you receive. Speaking of interest rates, you may expect your personal loan’s rate to be far higher than your mortgage’s rate if it is being utilized as a down payment loan.
- Down payment support.
There are numerous state-sponsored programs for first-time homebuyers that may help you with your down payment.
- Selling of assets
It might be time to sell off items like a boat or a second car to create money for a down payment. You might have some investments you can access, some priceless jewels or collectibles sitting around, or you might be able to access some investments. The long-term benefits of keeping onto the asset must be weighed against the advantages of purchasing a home sooner and/or with a higher down payment.
- Planned savings.
The gradual and steady method of earning money for a down payment is to set aside a little more from your household budget each month. It’s excellent preparation for the additional financial strain that a mortgage payment is likely to entail. However, taking a cautious approach in real estate markets that are seeing rapid growth could result in you missing out on a chance.
Before deciding to make a spot down payment or even to buy a property outright, be sure to weigh the short- and long-term repercussions. The amount of your down payment is a trade-off between short-term and long-term advantages, like many other financial decisions.
One of the top home builders in the Philippines, BRIA Homes is ready to make condominiums and house-and-lot packages more accessible to typical Filipino families.
Visit the BRIA Homes website for additional information and inquiries.
Written by Bermon O. Ferreras