Why are Down Payments Important When Investing in Properties?

What is a down payment?

Before you purchase a home, you have to have an amount of capital that gets put towards the home in the first place. That’s what is known as a down payment. When you speak with your lender about this, they will inform you that the down payment will be deducted from the purchase price required to buy the property. As for the rest of the balance, that’s where your mortgage comes in. 

What are some considerations?

In terms of how much is required from you as a down payment, it depends on the purchase price of the property in question. The next section will detail how to calculate your minimum down payment. Other things you should consider are your employment status and credit history. For instance, if you have a poor credit history, then that may result in a larger down payment. If you are self-employed, then your lender might inform you of a higher down payment as well. 

How do I calculate my minimum down payment?

To calculate your minimum down payment, you should first understand that it depends on the purchase price of the property. As an example, if the purchase price is more than $500,000, then the minimum down payment is calculated by adding two different amounts together. 

The first amount pertains to 5% of the $500,000, while the other amount refers to 10% of $100,000 as a remaining balance. When added together, the total is $35,000, which is the minimum down payment amount. 

In terms of another scenario, let’s say you’re interested in a property that costs either $500,000 or less. If the purchase price is $400,000, for example, then a minimum down payment of 5% of that price is required of you. When calculated, this amounts to $20,000.

Do I need mortgage loan insurance?

You may require mortgage loan insurance because of your down payment amount. This type of insurance helps protect the mortgage lender if you’re unable to make your payments. 

Let’s say your down payment amounts to less than 20% of the purchase price of a property. This means you must purchase mortgage loan insurance. Additionally, your mortgage lender can require you to purchase the insurance even if your down payment amounts to 20%. Typically, mortgage loan insurance is needed in situations where you either have a poor credit history or are self-employed. 

It should also be noted that mortgage loan insurance is unavailable to you if the home you wish to buy has a purchase price of $1 million or more. Moreover, the mortgage loan insurance is not available if the loan does not meet the standard of the insurance company involved.