Lesson Personal Finance: Concept of Downpayment in Mortgages

Source code of 'Personal Finance: Concept of Downpayment in Mortgages'

This Lesson (Personal Finance: Concept of Downpayment in Mortgages) was created by by mukta.dharma(0)

: View Source, Show
About mukta.dharma: I am a student pursuing MBA in India

<b>Down Payment</b>

A <A HREF="down_payment.wikipedia">downpayment</a> is usually an upfront payment made by the borrower at the time of acquiring the loan. The down payment is a security for the lender so that in case of default, he needs to realize only the difference between total loan and down payment by selling the <A HREF="Collateral_%28finance%29.wikipedia">collateral</a>. Down payment amounts vary based on a number of factors. In competitive and growing markets, down payments on mortgages typically fall between 5-10% of principal. Post 2000, there has also been a trend towards zero-down payment loans.

As a result of making the initial downpayment, the borrower might either experience reduced monthly payments for the given term, or a reduced term with the same monthly payments. Given the initial down payment, the monthly mortgage payments can be calculated as follows

<center>
{{{EMI = (P*(1-dp)*r) * (1+r)^n/((1+r)^n-1)}}}
</center>
where dp is the percentage <A HREF='down_payment.lesson'>down payment</A>

You can also use this <A HREF="calc-EMI-DP.solver">calculator</a>.