Quest for buying one’s own home is onerous. It requires time, money and a lot of effort. More than what you want, what you can afford is crucial when it comes to buying an adobe.
When talking about a new house, the one thing that you have to first prepare for is the Down Payment. It’s an initial amount you pay upfront for a higher value item, such as a house or a car, which is a percentage of your total purchase value. It comes out of your pocket as oppose to borrowing. Once you pay the down payment, rest of the amount can be paid by obtaining a loan.
So, let’s first know how to start saving for down payment.
Save Save and Save: In my earlier blog Financial Tips ever’ 20 must know, I had mentioned about the importance of saving from an early age. With regular income and returns from investment and the power of compounding, your savings would snowball into a sizable corpus to pay towards your first home.
If you are in your last 30’s, you can still build your corpus by saving and adjusting your lifestyle and finding additional source of income like a part time job.
Budget: Add saving for your Down Payment in your monthly budget and work on it. Start treating it as an expense and keep the money aside diligently.
Transfer the savings into investments: Once a sizable amount gets collected, don’t let it sit idle. Let money earn you more money. Invest it in safe and secured options like Bank Fixed Deposits or Debt Instruments where your capital will remain safe and any interest or dividend earned is a blessing.
Automate the savings: If you are directly saving money in your bank account each month, make it an automated process so you don’t forget to do so. This way you can ensure your progress towards your goal.
The more you save for your Down Payment, the less EMI you will have to pay. So, consider this when setting your goals.
Now let’s understand how much Down Payment one should make and Pros and Cons of it.
Pros of High Down Payment
. You have less EMI to pay as the loan amount is less.
. Banks will easily approve your loan if the amount is less. So, for a house of INR 1 crore, if you wish to go for only 50% loan rather than 80%, the changes of getting approval quickly is high.
. This again helps in cost savings as processing fee and home loan insurance premium is dependent on the loan amount.
. When you have less loan, you easily qualify for future borrowings.
Cons of High Down Payment
. A chunk of your money gets taken away for payment which could lead to financial crunch in the time of crisis.
. Loan repayment gets you tax benefits on the principal and interest both and lower the amount means lower the benefits.
. If you take loan from relatives and friends to pay extra towards your down payment, invariably, you are still in a lot of debt.
When a huge amount of money is removed from your saving, you need to replenish that amount for your next big need or just to save up for future. So, once your goal of down payment is attained, continue sparing the same amount again and save it. Every penny saved is penny earned.
“Ways to build your wealth after buying a House” is the topic for my next blog. So stay around and hope I am giving something interesting for my readers each time in my blog.
Till Next Time
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