4 Benefits of Having a Substantial Deposit When Taking a Home Loan
Financial experts recommend that by making hefty cash deposits, prospective homeowners can derive greater benefits even if the interest rates are much lower. In recent times, the average amount of deposit required by most banks has fallen drastically, which is a good sign. This makes it easy for prospective buyers to enter the market, as there is no longer the need to have hoards of cash to bring to the table first. However, the benefits of having substantial deposit when taking out a home loan remain constant. In this article, we will tell you 4 benefits of doing so.
1. Low Rates of Interest
Lending institutions prefer offering improved interest rates if the loan-value ratio is lower. A rise in the down payment reduces the ratio as well as the risk for the lender. Low rates of interest might also help you save great sums of money during the life of the loan.
2. Low Mortgage Payments
By offering a higher amount of initial deposits, you can make your monthly mortgage payments lower. This will certainly assist you in improving your budget; however, it will have a more steady impact on saving the interest amount during the entire mortgage life. If, for example, you have a 30 year mortgage with an interest rate of 5 percent and you decide to add $10,000 more, it will result in $9,325 savings in interest payments.
3. Zero Mortgage Insurance Fees
A traditional mortgage requires upfront payment of at least 20 percent of the purchase price of the house. Mostly, lenders require you to secure mortgage insurance if you wish to make smaller upfront contributions. The mortgage insurance gives greater protection in the event you are unable to repay the mortgage amount.
To address this issue, there are several federal insurance programs available for eligible purchasers, whereas there are also several private insurance options. For many people, mortgage insurance can be very costly, ranging from around 0.5 to 1 percent of the total cost of the home. Also, insurance premiums serve as an additional cost of mortgage without being applied to the mortgage balance.
4. Lower Risk at Selling
In fact, the real estate market can demonstrate volatility after you have bought your home. In case, the market is facing a downsizing position where you consider selling your home, you will see that the mortgage balance is much higher compared to the value of the house. This is called an up-side down on the mortgage. The situation offers you less flexibility to accept offers, whereas it can also make it difficult for you to sell the home and pay the mortgage. On the other hand, if you make a substantial upfront payment, chances are remote that you would face an upside down on your mortgage.
