What is down payment in home loan

It is very important to repay your loan amount on time. Banks give the facility of flexible repayment structure and tenure to the customers. 

Customers have the flexibility to choose repayment structure according to their income and budget. It is very important to plan out your budget and income before making any decision. You can use tools like a home loan EMI calculator that helps you to calculate your monthly EMI along with the interest rate. This will help you to plan out your budget before applying for the loan.

But there is a way where you can decrease your EMI amount completely, and that is by making a down payment. 

What is a down payment?
Down payment is the amount that you pay at the initial stage of the home loan. Banks usually ask for 20% to 30% of the loan amount as a down payment. By making a down payment you can increase the trust between you and your lender. Along with this, it will also provide you with many benefits like lowering the total principal amount. 

Example:- If your home loan is INR 50,00,000 (50 lakhs) and the down payment is 30% (15,00,000) then the remaining amount that you'll have to pay as EMI will be 35,00,000. So the EMI that you would've paid every month at INR 50,00,000 with an interest rate of 8% at a loan tenure of 10 years is INR 58,491 and the interest rate over loan tenure is INR 2,403,854. Whereas the EMI that you'll pay after the down payment is INR 42,650 and the interest rate that will be payable over the loan tenure is INR 1,617,979. 

So from the above calculations, you will save INR 7,85,875 on the interest rate. So you can just imagine the amount that can be saved on EMI after making the down payment. 

It's important to make a down payment for a home loan. It will help you in many ways. Although there are banks like Dena bank home loan or BAJAJ finserv that provide you with home loans at 0% down payment.

Benefits of down payment:- 

1. Interest Rate:- As your loan amount will be decreased after the down payment so the interest rate which will be calculated on the remaining amount will decrease alternatively. So you can say that a down payment helps you to lower your interest amount even more.
   
   
2. Credit score:- If your credit score is low then you should make a high down payment to show your lenders that you are a creditworthy customer. Making a huge down payment will also help you to decrease your interest rate and will also reduce the loan amount alternatively. So it makes it easier to repay your loan amount, which will increase your credit score.
   
   
3. Borrowing power:- A huge down payment can make it easier for you to take another loan at the same time. It will also be easier for you to take an additional loan in the near future. Lenders like it when the borrowers have enough income to meet the monthly expenses and the loan amount. So income can mean a low debt-to-income ratio, which can help you look good in front of your lenders.
   
   
4. Loan amount:- If you pay a huge down payment then your loan amount will alternatively decrease. Which will make it easier for you to repay in smaller instalment. And your EMI amount will also be decreased so you'll have to pay less. For example:- If your home loan is INR 10,00,000 and you make a down payment of 30% (i.e. 3,00,000) so the remaining loan amount that you'll have to pay is INR 7,00,000 which is comparatively less than INR 10,00,000.
   
   

Conclusion:- Making a huge down payment can reduce the burden of repayment of the loan amount. Although a lot of banks give a percentage of down payment that you have to make, borrowers have the flexibility to make more down payment if they want to reduce the loan amount even more.

Must Read-Costs Associated With A Home Loan