Equity, Downpayment are they the same?
As a real estate agent, I usually get this question from my clients. Most specially the first time home buyers. Equity and downpayment, are they the same?
Browsing real estate websites and even social media posting in the Internet, lure us to click the link and read its content. The pictures are so inviting and the marketing materials looks convincing. But what really confuses us is the marketing terms and real estate terminologies that are quiet familiar but confusing jargon of real estate. Down payment and equity are two of the common terms we usually hear and see online. By definition ;
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 usually given in cash at the time of finalizing the transaction. Most of the time, it’s a spot payment or initial cash out to consider the transaction as final or confirmed. Usually used during brokerage transactions (re-sell).
According to Webster, it is the value of a mortgaged property after deduction of charges against it. To put it in lay mans 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
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
Sometimes; if with Reservation Fee 50,000 for example;
[(Total Contract Price – Loanable Amount) – Reservation Fee] = Equity
[(Php 2,500,000.00 – Php 2,000,000.00) – 50,000 = Php 450,000.00 EQUITY
So is equity equal to downpayment?
The answer is NO. It is not at all times or not in all transaction where downpayment is equal to equity. Downpayment are usually set either by the seller or buyer to finalize the transaction. 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 2 terminology means the same. Although in essence it looks like it is, but if you’ll 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 depending 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 maybe negotiable is if you go higher in amount or percentage or choose a 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 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 absolutely 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 actually looking at the monthly equity. Down payment is usually used in brokerage transactions.
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