When you approach a lender for your mortgage, you will initially be asked the amount of money that you are willing to pay as down-payment. The lenders will then tell you if they can lend you money and on what terms, depending on the amount you quote. Down payments are linked with various other factors in your borrowing process. Some of the factors are as follows:
Down Payment and Credit Scores: Usually 0% to 20% of the property cost is considered as down payment. You could also pay more than 20%, but usually people would not do so. They would prefer to keep cash on their hands. After the sub-prime fiasco, you are only likely to get a zero down payment mortgage if you are a veteran or have an excellent credit score.
Down Payment and Interest Rates: The more down payments you offer, the more you have at stake to lose in the event of a foreclosure. This reduces the banks risk. You are offered a better interest rate, if you are paying more money upfront.
Down Payment and Borrowing Capacity: You could buy a bigger house and borrow more by making a bigger down payment.
Down Payment and Insurance: If you are offering less than 20% of the loan value as down payment, then you have to take a private mortgage insurance (PMI). This is supposed to offset the lenders risk in case of default. However, it is added expenditure that you pay month after month.
Hence, if you have the money to make a 20% down payment, the terms become much more favourable…