28/09/2021
The Truth About Down Payment and Equity
Browsing real estate websites and even social media posting on the Internet, lure us to click the link and read its content. The pictures are so inviting, and the marketing materials look convincing. But what confuses us is the marketing terms and real estate terminologies that are quite familiar but confusing jargon of real estate. Down payment and equity are two of the standard terms we usually hear and see online. By definition; equity-vs-downpayment
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Down payment
Down payment (or downpayment) is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due, and it is in cash at the time of finalizing the transaction. Most of the time, it’s a spot payment or first cash out to consider the purchase as final or confirmed. Usually used during brokerage transactions (re-sell).
Equity
According to Webster, it is the value of a mortgaged property after deduction of charges against it. To put it in lay man’s term, It is the difference between the total amount of your house and the loanable amount.
To put it in a mathematical equation it is;
Total price – Loanable Amount or percentage = Equity
For example;
The total contract price is Php 2,500,000.00, the loanable amount set is Php 2,000,000.00. Therefore, the equity is Php 500,000.00
Php 2,500,000.00 – Php 2,000,000.00 = Php 500,000.00 EQUITY
So is equity equal to downpayment?
The answer is NO. It is not at all times or not in all transaction where down payment is equal to equity. Down payment is usually set either by the seller or buyer to finalize the purchase. Equity, however, is the remaining amount of the total price of the property not covered by the loanable amount.
A lot of times people think that this two terminology means the same. Although in essence, it looks like it is, if you dig in further for the meaning of each term, they do differ in many ways.
How to compute for the monthly equity?
The monthly equity of the property depends on the number of years or months set by the property developer. Usually, it is set in 3 months up to 60 months based on its price and project.
Going back to our example (above) with Php 500,000 equity, if the property developer set it at 24 months. It means that the homebuyer has the chance to pay up the equity for 24 months in an amount divided equally throughout the period.
For a better illustration, here’s a mathematical equation for you;
(Total price – Loanable Amount or percentage )= Equity
Equity Amount / # of months = Monthly Equity
Php 500,000.00 / 24 months = Monthly Equity
20,833.33 / month = Monthly Equity
Are equity payments negotiable?
It depends. The only time equity payments may be negotiable is if you go higher in amount or percentage or shorter payment terms. Negotiations to stretch the number of months longer than what was pre-set by the project developers is almost impossible. You can also request to pay for a higher amount of equity in percentage to lower your loanable amount but not the other way around.
In the Philippine real estate marketing, most of the marketing materials will contain the monthly equity figures in print. Monthly equities can go from 5% to 30% of the total contract price of a project, then post the calculated monthly equity. Why are they doing that? Because of marketing wise, it’s a triggering factor, it plays around your thoughts, and it gives you that feeling that you wanted to inquire and ask more about the project. Some people call it false advertising, but it’s not. It is a marketing strategy that works best even until now.
So next time you see that marketing material at the mall or over the internet, you are looking at the monthly equity. Down payments are used in brokerage transactions.
