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What is Money Down?

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  • Last Modified Date: 16 December 2014
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Money down refers to a down payment on a purchase in order to reduce financing costs and monthly payments. Typical large purchases that call for money down are homes or real estate and vehicles or pleasure craft. In many cases lenders will try to entice buyers by offering special deals that require “no money down,” but these offers typically have higher interest rates and steeper monthly payments.

The amount of money down required on any particular purchase is usually one of the key deciding factors for buyers along with monthly payments. While it feels good to get something for very little or no money down, financing greater sums means paying more interest over the long haul and shouldering higher monthly payments or installments. Buyers must choose between placing less money down and borrowing more, or placing more money down and borrowing less.

In the case of buying a first home, lenders typically prefer to have a minimum of 20% of the value of the home as a down payment. On a house selling for $325,000 US Dollars (USD), the minimum down would be $65,000 USD. This isn’t a hard and fast rule, just a general guideline. Assuming the buyer does pay 20% down, the financing company (lender) makes up the balance on the buyer’s behalf so that the seller gets paid in full. Now the buyer owes the lender $260,000 plus fees and finance charges.

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Depending on the type of loan, the buyer might spend the first several years making payments that go towards interest only, before ever working off the principle. In many cases people turn over property within a few years, using the buyout price to pay off the old mortgage loan. If the property has appreciated enough, the seller ends up with enough profit to put money down on a new piece of property, usually a larger house or a house in a nicer area. In other words, the buyer upgrades.

While real estate is generally considered to be a good investment that appreciates with time, buying vehicles or pleasure craft present a different equation. New vehicles, for example, significantly drop in value the moment they are driven off the lot as they go from being classified as “new” to being reclassified as “used.” Consequently, a buyer tempted by a “zero money down” offers can find that his or her loan is significantly higher than the worth of the vehicle for the first two or more years of the loan period. If the buyer has a solid and substantial means of income and simply no cash on hand, this can be a good deal worth the trade off. But that’s not always the case.

Zero money down offers can tempt some people to buy vehicles beyond their means. Once the newness wears off, these people find themselves stuck with steep monthly payments and high finance charges that can dog tight monthly budgets. In some cases this results in cessation of loan payments and repossession of the vehicle.

In real estate there are many good reasons for putting minimum money down on property assuming a comfortable mortgage payment. It creates better cash flow and can have tax benefits. The opposite is true for vehicles and most other big-ticket items. In these cases it’s considered better to put as much money down as possible. The less you finance the lower your monthly payment will be and the more money you’ll save in the long run.

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Sunny27
Post 4

@GreenWeaver -I wanted to say that sometimes buying a car with no money down might not be a bad idea. My husband recently obtained a no money down car loan and he is thrilled. The loan is for five years and it gets drafted from our bank account.

He did not have to put money down on the car and was able to make the car payments with no problem because it was not too high. I think that this is important because if the car payment were too high then it might become more of a burden than a blessing.

The dealership tried to convince him to get gap insurance which basically was insurance that would cover the difference in the price paid for the car and the actual appraisal value. The only time this is a factor is if you get into a car accident, but the odds of that happening are slim.

He always declines the insurance, but it is something that they try to sell you in these situations.

GreenWeaver
Post 3

@Sneaker41 - You are right. There are a lot of government programs that allow qualified buyers to buy homes with 3% down in order to encourage home ownership, so you could buy these homes and not have to put too much down.

The problem that I see with these programs is that buying a home involves paying taxes, maintaining the property as well as the mortgage payment. I think that if you do not have a sufficient down payment, you might be setting yourself of for failure especially if you have limited funds in the bank.

Anything could go wrong and buying a house is a big commitment. I would never buy a home without at least a 20% down payment.

sneakers41
Post 2

@SurfNTurf - I agree with you. A no money down mortgage is a recipe for disaster. The other thing to keep in mind is that if you have less than 20% equity in the property, you will be forced to pay private mortgage insurance which is an additional fee added to your mortgage payment that you will be forced to pay until your obtain 20% equity in your property.

This is like foreclosure insurance because banks have statistics that prove that people that buy homes with less than 20% equity will be most likely to face foreclosure. I think that you really need to buy a home with enough money down because if not the home might become a nightmare instead of a dream.

surfNturf
Post 1

I have heard of people buying a home with no money down, but they usually take out a traditional mortgage loan for 80% of the value of the home and a second mortgage for the remaining 20% down payment.

The problem with a no money down mortgage is that you don’t have any equity in the property. If you buy a home during a bad real estate market then you could even have negative amortization which means that you owe more on your home than what your home is worth. This happened to a lot of people as a matter of fact; I heard that about 30% of all homeowners are facing this problem.

If you owe more than the home is worth, you will not be able to refinance the property should more favorable rates become available. It is almost like you are trapped in your home because you will have a hard time selling it too and will probably have to sell it for less than what the home is worth and owe the bank the difference or if you are lucky, you might be able to do a short sale with the bank.

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