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Down Payment
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A down payment is paid by a borrower when buying expensive properties and assets to show the lenders that you are willing and able to repay the loan. The range of the down payment for mortgage loans is 3% for Federal Loans to 20% although other homebuyers are able to raise as high as 25% so they can be granted loans with the low APR being the annual percentage rate. Car loan down payments may range from 3-13%.

It is important to note that the more the down payment paid the better the terms of the loan will be. This is because lenders will have something to fall back to when the borrower defaults. The loan to value LTV will be less than when there is no upfront payment by the borrower. When the borrower pays 25% upfront the LTV will be 75%. The borrower will only be risking 75% of the value of the house and will most likely recover this money after re-possessing and auctioning it when the borrower defaults.

FHA loans are guaranteed by the Department of Housing and Urban Development. They offer a down payment of 3% or less. These loans are good for low income earners, those who have been declared bankrupt and borrowers with bad credit ratings because the interest rates are low and monthly repayments are less than with private loans. However there is a limit of how much one can borrow.

There are lenders who offer 100% financing. Veterans are offered 100% financing by the Department of Veterans. Teachers and Medical professionals qualify for similar loans. Loans offered with zero down payments by banks and other private lenders are more expensive because of the high risk involved. A borrower who cannot save and raise a down payment may not be able or be willing to repay the loan and might default or make late monthly payments.

Most lenders ask the borrowers to pay private mortgage insurance to cover the loan in case of default. Other lenders may not be willing to lend such loans because of the high risk. If the borrower defaults and the asset or property loses value even if the lender repossesses and sells it they may not be able to recover the full loan balance. However when the borrower has other advantages to compensate like

- A low debt ratio
- High credit score, the lender will be willing to grant the loan without any down payment.

There are popular 80/20 mortgages where the bank lends 80% mortgage and a second mortgage of 20% to pay the down payment. However the 20% mortgage usually bears a higher interest rate than the 80% mortgage. The advantage of this arrangement is that the borrower will not be required to take the private mortgage insurance. The borrower can request termination of PMI if they pay 80% of the loan or the appraised value of the house. People borrowing loans should try to raise at least some down payment.

Last modified onTuesday, 02 April 2013 23:44
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