31 Aug
Down payment is a term that comes in the context of buying expensive assets, or services or when borrowing a loan. The down payment amount is the sum of the amount that needs to be paid before you enter into a contract to purchase a property. It is used to unburden buyers’ pockets while buying high-priced assets. Moreover, a down payment allows the buyer to pay a portion of the purchase price upfront; it also enables them to get a loan from a financial institution to pay the remainder at low-interest rates.
Down Payment Meaning
Down payment is the amount the buyer pays early in purchasing an expensive product or service. In other words, A down payment, also known as a principal down payment, is a sum of money that a buyer pays up-front to acquire property or sometimes to secure an interest rate reduction or closing discount. Moreover, a down payment is also referred to as a deposit.
Example
A common example of a down payment is when a buyer purchases a car or home, he pays a portion of the total purchase price. For example, suppose a buyer purchases a house, and the house’s total purchase price is $500. In a down payment, the buyer may pay 5% to 25% to the seller, while the buyer pays monthly installments plus interest to cover the remainder.
How To Calculate a Down Payment?
A down payment can be calculated through a mortgage calculator. It figures out how much you will have to pay in monthly installments.
Let’s calculate the down payment.
John wants to purchase a house. The cost of a house is $8000.The house seller asked him to put 2.5% as the initial payment for the house, and he agreed and paid the initial payment; after that, he applied for a mortgage loan at a bank to pay the remaining purchasing amount.
Based on the initial deposit he agreed to pay, the bank provided him a 20-year mortgage with a 2% interest rate. However, John wants to keep the monthly payment as little as feasible. As a result, he made an upfront payment of 20% of the purchase price. He used the online mortgage calculator to determine his monthly installments to choose between the two options.
Scenario 1
- House value = $80000
- Down/initial payment = 3.5% = 3.5*80000=$2,800
- Remaining amount = $80000- $2,800 = 77200
- Loan term = 20 years
- Interest rate = 2%
However, when calculated using the online mortgage calculator, the monthly payment will be $390.54. This is because it excluded property taxes and homeowners insurance premiums.
Scenario 2
- House value = $80000
- Down/initial payment = 20% = 20*80000= $16,000
- Remaining amount = $80000- $16,000 = 64,000
- Loan term = 20 years
- Interest rate = 2%
However, calculating monthly payments using the online mortgage calculator, the monthly payment will be $323.77. This is because it excluded property taxes and homeowners insurance premiums.
Thus, the difference in the monthly payment will be:
$390.54 – $323.77 = $67.43
$ 67.43*12 = $809.16 yearly payment
Thus the monthly payment will be $809.16
$809.16*20=$16,183,2 20 years payment
Conclusion
In this article, we have discussed the definition and calculation of a down payment. It should give you a fair idea about the same. Moreover, a down payment is a sum of money the asset buyer needs to pay to the bank or seller immediately after signing the contract. The purpose of putting down a deposit is common sense: it shows that you are serious about buying the house and shifting your residency.
Shabana has been a committed content writer and strategist for over a 5 years. With a focus on SaaS products, she excels in crafting compelling and informative content.
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