Payment Procedures When Purchasing A Home

One of the largest dilemmas people face in their lives is whether to continue paying rent, or purchase their own house and pay for mortgage instead. In general, it is often superior to purchase a house due to the potential investment gains. An exception to this would be a family that is constantly on the move, where purchasing and reselling is often not a financially stable approach to home ownership.

Payment Procedure

The large majority of individuals do not pay 100% cash when purchasing a house, as it is quite a lot of money that the average individual does not have access to. The process involves a down payment in cash which is a chosen percentage of the sale price, whilst the bank provides a mortgage loan to pay for the remaining amount. This mortgage is then returned to the bank per month as a calculated amount (depending on how much down payment was made), and is paid off over a certain number of years. When 100% of the price, plus the interest is paid off, the house then belongs to the individual, and payments are not required thereafter indefinitely.

It used to be that zero dollar down payments were widely available with 100% mortgage, however after the recession in the last decade, this unsafe practice is now restricted for safety. The general rule of thumb is that, the more down payment that is made (implying financial stability), the easier it is to get the bank to sanction a mortgage loan. In addition, the lower the interest rate for the mortgage, the less money is paid back to the bank per month.

Monthly payments

Depending on the bank, the average monthly payment is 0.7% to 1.2% of the purchase price, which therefore determines the monthly payment. On average, this results in $1,500/month on a $200,000 home. However, this amount can be inaccurate as there are the following factors that determine the true monthly payment amount:

  • Interest rate: This usually depends on the bank, as well as the financial deals offered at the current season. In general, the lower the interest rate, the lower the monthly payment becomes.
  • Down payment: As the amount paid during the down payment is made, the monthly payments over a certain period of time (e.g. 15 years) becomes less, as a lion’s share of the payment is already made during the initial purchase. On the other hand, low down payments imply higher monthly payment, which in addition, compounds with the interest rate.
  • Payment time: The longer the loan is extended over, the less the payments are. However, this implies paying more interest to the bank over the periods, which on a longer span, results on inefficiency.

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