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 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.
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.
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.
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.
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
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.