Category: 

What is a Home Loan Deposit?

Article Details
  • Written By: N. Madison
  • Edited By: Jenn Walker
  • Last Modified Date: 25 January 2020
  • Copyright Protected:
    2003-2020
    Conjecture Corporation
  • Print this Article

A home loan deposit is an amount of money a mortgage borrower pays to a lender at the outset of a loan. The deposit provides the lender with security; in the event the borrower defaults, the lender keeps the deposit amount as compensation. It also ensures that the borrower has some equity, or ownership, in the home from the outset of the loan. From the viewpoint of the lender, this may make an individual less likely to default on the mortgage.

The amount of money a person must have for a home loan deposit depends on a number of factors, including the home’s purchase price, the lender, the borrower’s credit rating, and the borrower’s willingness to pay private mortgage insurance. In the past, many mortgage lenders required borrowers to pay home loan deposits that amounted to at least 20 percent of a home’s purchase price. Over time, however, lenders became more flexible with home loan deposits. They began to accept 10 percent, five percent, and sometimes even less for a home loan deposit.

In general, lower deposits require a borrower to pay more interest. For example, a person who makes a 20-percent home loam deposit is likely to enjoy a lower interest rate than a person who makes a five-percent down payment. An individual’s credit rating, however, may also play a role in the amount of interest he has to pay. Those with lower credit scores usually face higher interest rates.

Ad

Making a higher home loan deposit often translates into overall savings in housing-related costs for a borrower. In most cases, a borrower who makes a home loan deposit of at least 20 percent is not required to pay private mortgage insurance. Private mortgage insurance is an insurance coverage a borrower buys for the benefit of the lender. In the event that the borrower defaults on his loan, the insurance company pays the lender. Many lenders are unwilling to grant a home loan with less than a 20-percent home loan deposit unless the borrower agrees to pay for private mortgage insurance.

In some jurisdictions, a person who has limited money for a home loan deposit may take advantage of government programs that provide assistance for those with limited money available for down payments. Often, such a program insures loans given to eligible borrowers. This means lenders can grant these borrowers loans with lower deposits yet take on less lending risk.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email