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August 29, 2021
If you are thinking about buying a property in the Mayan Riviera, it is crucial to know how much money you will need for your down payment. You can choose how large the initial payment is, and the decision is not always easy.
Here we share some points to take into account before you close your deal.
In the process of buying a real estate property, the bank will finance only a portion of the home’s value: usually 80%, and sometimes up to 90%. Each financial institution has its own funding policy.
The down payment is the difference between the purchase price and the amount financed: that is, the money that you will have to pay at the closing of your home’s acquisition.
The higher your down payment, the lower the risk for your lenders. By reducing your lender’s risk, you can potentially reduce your interest charges. So, if you can make an upfront payment of at least 20%, you can cut your interest rates and your monthly installments. As a result, you can save thousands of dollars throughout your loan’s life by taking advantage of one or two points lower interest rates.
For example, consider a 60-square-meter property in Playa del Carmen, which has a $130,00 USD purchase price.
With only a 10% down payment and a 12% interest rate for 15 years, your annual payment for the loan will be approximately $17,200 USD, with a very low net cash flow (nearly $4,300 USD).
With a 20% down payment, you are able to negotiate a lower interest rate with the lender, say 10%: thus, your annual payments would be approximately $13,700 USD.
So, by adding $13,000 USD to your total down payment, and with a two point interest rate cut, you could save $3,500 USD per year, during the 15-year loan duration.
The more you pay as down payment:
The smaller your yearly payments will be.
Unlike a 10% down payment, if you pay upfront the 20% of a $130,000 USD property’s value (with a 12% loan interest rate), you may save almost $2,000 USD per year for a 15-year term ($15,300 USD vs $17,200 USD); and nearly $4,000 USD if you consider a 30% down payment ($13,400 USD vs $17,200 USD).
For example, keeping the same annual payment of $17,200 USD, the repayment period will be 15 years with a 10% down payment, and 11 and a half years with a 20% down payment.
An emergency fund is a reserve of cash that is set aside to meet extraordinary high-cost repairs and renovation expenses, which are not considered as operating expenses.
It can be a sound management decision if you take it into account from the beginning.
There is a rule called “50-30-20”, developed by Forbes magazine, that explains how to better manage finances, and how to distribute income among different types of expenses:
When you decide your down payment amount, it could be a good choice to allocate a portion of that free cash into a reserve intended for extraordinary expenses (for example: a roof repair, the replacement of the air conditioning system or the home appliances).
These are expenses that are discretionary now, and that nevertheless can be transformed into essential ones. For this reason, it would be better to protect yourself in advance.
These are expenses necessary for ordinary repairs and maintenance, which usually are lower than the costs indicated above.
They are recurrent operating expenses, and therefore are already included in the property’s cash flow calculation.
The decision about how much money you should pay for your down payment must take into account these expenses (extraordinary and ordinary).
During your working life, you may have to make the decision to save less for retirement and pay a down payment for a property that is your investment for the future.
Once you can save 10 or 15% of your salary in a good retirement plan, which is a priority for your personal finances, you can think about how much money you can spend on a down payment.
Remember that saving for a property is considered a medium-term objective, while planning for your retirement has to be a long-term objective.
Once you have decided to buy a property in the near future, let’s say in two years, you could temporarily interrupt the payment of your retirement savings and allocate it to your down payment, especially if you are close to retirement: this should not cause problems to your financial strategy. For example, if you are investing $500 USD a month in your retirement plan, you can freeze these payments for two years and allocate the $12,000 USD you saved to a down payment.
You have to consider all your other debts.
In this case it is useful to calculate the Debt-to-Income (DTI) Ratio.
The DTI represents how much of your monthly income is used to pay debts.
A low DTI means the possibility of having a higher future borrowing power.
A very high DTI can prevent you from obtaining other loans.
Most mortgage lenders require a DTI of 45% or lower.
When you are deciding about the down payment percentage, you have to take into account how the financing amount could affect your DTI ratio.
In general, you need to evaluate the pros and cons for a bigger or smaller down payment, based on the different points mentioned above. The better option would consider at least 20% of the property’s value as upfront payment.
But there are many factors which come into play in these kinds of decisions.
Thus, ask your real estate advisor the different combinations of down payment according to our financial calculation model, to choose the most appropriate amount for your needs: this will help you manage your financial strategy and increase your real estate investment’s returns.