For most people, investing in real estate is a decision that requires a lot of contemplation- and rightfully so. Real estate gives a good return on money and allows you to put it to good use. But making this decision is not easy. You have to think of the perfect payment plan that suits you.
There are so many plans out there; from construction-linked plans to down payment plans, you have numerous plans that you can choose from. Some plans offer low benefits but are safe and reliable.
Others are extremely beneficial and offer huge discounts, but they require you to make risky investments. At the end of the day, you need to know your priorities, whether you want to spend all your money at once or pay it in installments.
If you are considering buying property, we recommend you read this article thoroughly. From discussing the pros and cons of each plan to making comparison arguments, we have left no stone unturned. So without further ado, let’s get started.
Types Of Payment Plans In Real Estate
With the rising interest in real estate, diversity in payment plans has also increased. Before, people could choose from installment plans and down payment plans. Now, they have a wide variety of options to choose from. Here is everything you need to know about these plans.
Construction-Linked Plan (CLP)
Construction-linked plans are fairly common and provide ease to customers. Unlike other plans, you don’t have to pay installments on a fixed monthly or yearly basis. Instead, you pay installments depending on the progress of your real estate building.
Although you don’t get any discounts or concessions with this plan, you will enter into a predetermined contract with your developer. For any construction milestone that is achieved, you will have to pay money accordingly.
This usually means you will pay once the floor is made or when the walls go up. There is room to negotiate beforehand so you can pay the amount according to your convenience.
Most construction-linked plans require you to pay around 10 to 15 % of the cost upfront and the remaining according to the construction-related milestones that the developer achieves. Most developers will require you to pay 20% of the construction cost of each floor.
Pros
This is a very safe and reliable plan for both the buyer and the developer. Buyers are not at risk of losing hard-earned money, as they can see the progress of each floor for themselves. They can visit the place each month and pay the cost after ensuring that each floor has been constructed properly.
This plan also provides a great incentive to the developer. Unlike the timed plan, the developer has a greater incentive to complete the project earlier to get the cash to flow in consistently.
Cons
One of the biggest problems with this plan is that it requires the buyer to pay slightly more interest to the bank. This amount is payable for the duration of the construction and stops once your building is complete. Once the construction ends, the buyer only has to pay money in the form of principal payments. So in some cases, the buyer may end up paying more than the property is worth.
Who Should Choose This Plan?
This plan suits people who don’t want to take financial risks and work within a limited budget. Moreover, it suits people who want to take beneficial loans from banks.
Time-Linked Plan
As the name suggests, time-linked plans require buyers to follow a particular timetable. Unlike construction-linked plans, the installments must be paid regardless of how much or how little the progress on the project is. The buyer and the employer enter into a contract where a predetermined timetable is agreed upon.
This type of plan has sharply declined as it gives buyers less guarantee. However, some developers still offer this plan in exchange for a small discount of usually 10 % on the basic cost of the property. This proves to be a major incentive for buyers.
Pros
Many believe that time-linked plans expose buyers to potential fraud, but that is not the case. US laws are quite strict and hold developers accountable if they commit fraudulent activity. That being said, this plan works for some people who want to enjoy discounts on the basic cost of the property.
This is still better and safer than down payment plans, where the buyers have to pay the entire cost upfront and put their entire trust in the goodwill of the developer.
Cons
Although the developers are held accountable if they don’t follow particular guidelines, there is very little to mandate them to finish construction on time.
The buyer will be required to pay the full installment money even if there is no progress on the property. Moreover, in cases of delayed construction, the buyer has very little room to contest claims.
Who Will Benefit From This Plan?
This is among the least popular plans out there. However, people with many ongoing businesses may want to enjoy discounts on the basic cost. This helps reduce the overall spending budget and allows the buyers to invest that money in an extra floor or two.
Moreover, these people are also not in a time crunch and can bear delayed construction. However, for people looking to hold builders and developers accountable, this plan is certainly not for them.
Down Payment Plan
If you can afford to take risks for great discounts and rewards on the plan, this is one for you. In this option, you will be required to pay the whole amount in down payments when you sign the contract. The buyer will be paying this amount directly to the developer or through a bank. They can even get an 8 to 10 % discount on the purchase price- but it might require some negotiation.
There are also some down payment plans where you can pay 10-15 % of the cost at the time of the booking and the remaining cost in around 45 to 60 days. However, there are other costs that are completely separate from the cost of your property. This includes registration charges, stamp duty, property tax, and maintenance charges.
Some buildings are quite lavish and include many extra amenities the developer provides. You will have to pay the developer additional money to build parking spaces, swimming pools, libraries, and gymnasiums.
Pros
One of the biggest reasons people opt for the down payment plan is that they can get huge discounts on the property value. 8 to 10 % may not seem a lot when you compare it with the risks involved; however, this is more than a fair deal for buyers working with trusted and reputed developers.
Additionally, since you will be paying the entire amount upfront, you won’t have to cater to increased interest rates. External factors like recessions or slow economic activities will also not hinder your plans.
Cons
Even the most reputed and well-known developers can delay the construction and make it difficult for you to get a hold of your building. You will have to pay the whole amount upfront, which means the developers have little incentive to hasten work and abide by their commitments.
The risk of losing your money is also great since it is almost impossible to recover the money from the developer in case of mishaps. You may find yourself swamped into litigation. Moreover, legal issues and external issues like recession or pandemics can affect work progress and may cause exponential delays for the buyer.
Who Will Benefit From This Plan?
There is no denying that this plan comes with certain risks. However, there is a silver lining to all this. Down payment plans are still quite popular. This is because buyers and developers who have worked before can trust each other to keep their end of the bargain. Moreover, this plan suits buyers who want to buy multiple properties simultaneously. Even a seemingly small discount of 8 to 10 % can amount to a lot of savings in the long run.There are many types of home loans out there and my job is to find the one that best fits your needs! I offer loans to Purchase or Refinance a home. I offer loans with and without down payments. Loans for great credit and loans for lower credit including past Foreclosures and Bankruptcy. Loans for Home Construction or even Remodels. Loans for Cash Out to pay off a Second Mortgage or other debts
Mortgage Loans
There are many types of home loans out there and my job is to find the one that best fits your needs! I offer loans to Purchase or refinance a home. I offer : Loans with and without down payments, Loans for great credit and loans for lower credit including past foreclosures and bankruptcy, Loans for Home Construction or even remodels, Loans for cash out to pay off a second mortgage or other debts.
A loan that conforms to conditions and terms of the government-sponsored enterprises Fannie Mae and Freddie Mac is called a conforming conventional loan while one that does not is called a non-conforming conventional loan. The down payment of a conventional loan can be higher but they do have programs for as little as 1% down! With Conforming Loans, the Mortgage Insurance options increase giving you more flexibility. They even have no monthly Mortgage Insurance with as little as 7.15% down. Generally these loans are for higher credit worthy clients because with lower scores FHA and USDA loans can be cheaper. These loans also allow for Investment Property and Second Home financing.
FHA offers several types of loan programs to individuals. The most common is the 203(b) mortgage insurance program which insures loans for purchase or refinance of a principal residence. Approved lenders issue the mortgage funds while FHA offers the Insurance if lender use their lending guidelines so really FHA is a Government Backed Mortgage Insurance Program. With an FHA loan, you will have an up-front mortgage insurance premium that is added to the loan then a monthly mortgage insurance payment so the cost of this insurance can be higher than a conventional loan. The FHA loan program offers borrowers many benefits including a low down payment of 3.5% (which can be gifted from equity, a family member, or even a Down Payment Assistance Program) and the credit and income guidelines are more relaxed on an FHA loan. This program allows past Bankruptcies and even Foreclosures in the credit history allowing many families a fresh start and options to get back to owning a home. FHA also offers a loan to purchase or refinance a home along with certain Home Repairs and/or Energy Efficiency upgrades. This is a great “Fixer Upper” loan program known simply as a 203k.
A mortgage loan program established by the United States Department of Veterans Affairs to help veterans and their families obtain home financing. The Department of Veterans Affairs does not directly originate VA loans; instead, they establish the rules for those who may qualify, dictate the terms of the mortgages offered and insure VA loans against default. VA loans offer up to 100% financing on the value of a home. To qualify for a VA loan, borrowers must present a certificate of eligibility, which establishes their record of military service, to the lender. VA loans, FHA loans and other loans insured by departments of the United States government are securitized by the Government National Mortgage Association (Ginnie Mae). These securities carry the guarantee against default of the United States government.
A jumbo mortgage is a loan that is above the limits set by the government and can change per county. For instance Washington County has a lower limit then Wasatch or Salt lake Counties. The cost of a jumbo loan is higher than a standard loan, so expect a higher interest rate for a jumbo loan. We offer Jumbo Loans in-house to 3 Million and have other sources to go even higher on a case by case bases. A jumbo loan can be used to purchase or refinance a home. Can be used to build or buy an existing home. You can use this loan for your Primary Residence, Second Home, or Investment Property. A jumbo mortgage may have a fixed or an adjustable interest rate. These loans can be a bit niche so call for a free quote on your specific needs.
The United States Department of Agriculture (USDA) Guaranteed Rural Housing (GRH) offers a 100% financing home loan program – meaning zero down payment required! There are certain specific requirements for his loan program, both for the borrower and for the location of the property. The borrower must meet certain income restrictions, and they must plan to occupy the property. The borrower’s income cannot be above 115% of the U.S. median income for the area, adjusted by family size. Best of all, you do not need to be a first-time homebuyer.
Benefits of a USDA Guaranteed Rural Housing loan program:
- No first-time homebuyer requirements
- Eligible in rural areas with a population of 20,000 or less*
- 102% loan-to-value financing (2% up-front Guarantee Fee included)
- Annual fee of 0.40%* of the unpaid principle balance will be included in monthly payment
- Fixed rate loan
- No financial reserve requirements
- Owner occupied residence only
- Income limitations vary per applicable city or area (Cannot be above 115% of the U.S. median income for the area, adjusted by family size.)
- Seller can contribute up to 6% of the sales price towards buyer’s closing costs
- 100% gift funds allowed from family member
As the cost of living continues to rise, seniors are increasingly utilizing the reverse mortgage to help them achieve financial independence in their golden years. A Reverse Mortgage is a federally insured financial tool that offers homeowners aged 62 and older the ability to convert some of their home equity into a supplemental cash flow. It can help provide financial security while guaranteeing that you continue to own your home – without giving up title, or making monthly mortgage payments. Best of all, there are minimal income and credit requirements, and you can use the money without any limitations.
Recent changes by Congress to the FHA-insured Reverse Mortgage program have now made it possible for seniors to buy a home with a reverse mortgage – to be closer to family, to switch to a single story or smaller home, or to move into an active adult community.
The Reverse Mortgage Program can be a great tool to help home owners at 62 and older. The down side can be the costs and interest rate for this program is much higher than a standard mortgage. I have an exciting new way to help those looking into a Reverse Mortgage that can reduce the costs and interest rate dramatically while still giving you control of your money and peace of mind. You owe it to yourself to have all the loan options available so simply call for a specific quote on how this loan program works in comparison to a Reverse Mortgage.
Subvention Plan
These are not very popular, and many of you might not have heard about them, but that doesn’t reduce their appeal. Developers offer subvention plans to buyers who want to eliminate the burden of paying EMI and rent. The builders will pay the EMI money instead of the buyer till the property is completed and possession is given to the buyer.
This very lucrative plan lures many buyers because, in most of these schemes, the cost of EMI is not put on the buyer. However, each subvention plan is different, and you can expect modifications depending on which developer offers the plan.
Some developers will pay the EMI till the time of the possession, whereas others will only pay it for a specific period. Regardless of the modifications, you will never have to pay the entire EMI cost. You and the developer will share it.
Pros
Subvention plans tend to sell themselves because they are attractive and highly appealing. The best thing about this plan is that it reduces the burden on the buyers, as they no longer have to pay the entire cost of the EMI.
Most buyers tend to take a loan from the bank and hence don’t have to worry about acquiring a huge sum of money very soon. Additionally, buyers tend to stay on rent, so delayed construction is not a big problem.
Cons
These plans are relatively new and do invoke some concerns. Buyers are often skeptical about the plan and either go for down payments or construction-linked plans. Subvention plans are also somewhat risky because if your developer breaks the interest payment, the buyer’s CIBIL is affected.
Who Will Benefit From This Plan?
In the absence of surplus cash, this plan can be a game-changer for the buyer. If you are not interested in bearing the high costs of EMI, this plan will suit you well. However, buyers who want to invest in many buildings should stay clear of this plan because if the developer breaks the agreement, it can lead to massive losses for the buyers.
Subvention Without Loans Plans
This is a subcategory of subvention plans. The builder will fund your purchase instead of your bank in this category, meaning the cost of EMI vanishes altogether. However, even with its appeal, this plan comes with some drawbacks.
When you take loans from a bank, you and the bank benefit from it. The bank hence has a greater incentive not to break the agreement. Moreover, banks are much more reliable and are free from most external pressures.
If you are an HNI buyer with a good amount of cash lying around and don’t find down payments worrisome, this plan is for you. You can pay the amount upfront and even get the builders to give you a higher discount.
Possession-Linked Payment Plan
In possession-linked plans, buyers have to pay 20 or 25 % of the total cost of the property upfront and the remaining 75 to 80 % at the time of the possession. This plan is similar to a construction-linked plan, but unlike construction-linked plans, it does not require buyers to pay money according to the milestones the developer achieves. This is a good plan because it provides both the buyer and the seller with greater security.
Pros
The plan serves the buyer’s interest as they can pay a significant amount after getting the property. This means that the builder also has a greater incentive to complete the property on time. The buyer will also not fear bankruptcy, as they do not have to pay for the property before it is ready.
Cons
Sometimes, the prices offered under construction-linked and possession-linked plans differ, the former being a little cheaper. Since the builder has to pay for the project’s development, they may be incentivized to quote a much higher price to the buyer.
Who Will Benefit From This Plan?
People who can incur a higher cost but don’t want to take a risk with their property will benefit from this plan. However, if you want to buy multiple projects simultaneously, you may not want to go with this plan, especially if the builder quotes a higher price.
Flexi Payment Plan
Many of you might not have heard of this plan, but it is fairly popular among the US audience. Flexi payment plans take inspiration from construction-linked and down payment plans. These require the buyer to pay 50 % of the cost of the property before the construction begins.
The remaining cost of the property is either paid according to the milestones the builder achieves or when construction starts. This plan is a bit flexible, and it is up to each developer to offer a unique contract.
It is worth mentioning that this type of plan is usually offered by new developers who have not established a solid reputation in the market. Since they are trying to increase their reputation in the market, they go for plans that suit buyers the most.
Pros
In a Flexi plan, the buyer and the developer have something in common: both benefit greatly from the deal. Where the builder gets almost half of the amount upfront, the buyer also gets a huge discount from the builder. Since builders are still finding new clients, they are incentivized to give a good discount. This can vary between 5 and 8 % of the cost of the property.
Cons
Even though the buyer is getting a good discount, they may also incur a huge risk. The buyer may lose money or investment if the property gets abandoned or the builder does not fulfill any commitments. If the developer is still new and has not earned a solid reputation, there is a high chance of this happening. It is also very difficult to recover your money if something unfortunate happens.
Installment Plans Vs. Down Payment Plans: Which One Is Better
Regarding real estate, the biggest confusion is between installment and down payment plans. While down payment plans seem like a lot and come with increased risks, there are also several benefits to look forward to.
Similarly, installment plans are not as good as they sound. They may reduce pressure on you but cost a lot more money. Since there are downsides to each plan, we have dedicated this section to compare the costs and benefits of each.
Installment Plans
There is a lot to be said about installment plans. Let us debunk some of the popular myths. Although installment plans seem amazing on the outside, they also come with their fair share of risks. But before we discuss that, let us understand what an installment plan is.
How Does An Installment Plan Work?
Most developers worldwide, especially in the US, offer 3 to 5 years of installment plans where the buyer has to pay a portion of the cost monthly. You must pay 10 to 15 % of the costs upfront and the remaining according to a predetermined schedule.
These fixed deposits must be paid monthly or quarterly on the decided date. Some developers charge you a fine if you fail to deposit the money on time. The remaining cost of the property is paid on the day of the final possession.
It is worth noting that you can not sell the property or start living in it before you pay all the installments. However, this varies according to each developer.
5 Reasons Why You Should Consider An Installment Plan
- Makes up for lack of money: The biggest incentive people have is the extended deadlines. Unlike down payment plans, you are not expected to produce the entire amount in one go. If you don’t have the cash immediately, you can reserve your property and pay the amount in 3 to 5 years.
- Satisfies urgent accommodation needs: Even when you don’t have the money, you still deserve a good home. Installment plans help you find easy accommodations on a budget. Most developers will allow you to use and live in the property after paying the initial few installments. This is also a perfect alternative for people who don’t want to live in a rented place.
- Allows you to invest your savings: Investing in property is worthwhile. It is less risky than most other alternatives, like investing in stocks. If you have some extra savings and can’t find a suitable place to invest, we suggest you select an installment plan and secure your hard-earned savings.
- Allows for easier budgeting: Most people must think hard about managing their finances. For middle-class people, this is quite a challenge. Installment plans are great for this purpose. Since you have to pay a fixed amount each month, you can easily allocate this portion from your budget at the start of the month.
- Fixed schedule makes for less stress: With down payments, you end up staying low on finances for a long time. On the other hand, installment plans offer fixed payment schedules that feel quite natural and habitual. Moreover, builders can not make an excuse for external factors like an increase in property rates to demand more money from you.
Full Down Payment Plan
When you see developers offering only down payment options, you may resist them. It may seem a lot, and down payments have been quite controversial. However, contrary to what people think, down payment plans can benefit you.
For starters, you get rid of any stress or burden of paying money every month. You don’t have to worry about leaving jobs or changing careers. Since installment plans require a steady income, you can’t think of getting creative with your career. This is something you can exercise with a down payment plan.
How Does It Work
There are a couple of ways to avail of this option. Most developers will require you to pay 10 to 15 % of the cost of the property upon signing the contract and the remaining soon after. Most developers will give you a time of 30 to 45 days to pay the entire amount.
Benefits Of Full Down Payment Plans
Here is why people all over the US and the world prefer this option.
- More developers prefer this option: You can expect a lot of competitive offers in the market due to its high preference. Most people selling their homes only offer down payment plans. This is because they want to reinvest the money elsewhere and prefer all the cash in one go.
- Quick and less risky for the seller and the buyer: Many people believe that full down payment plans are risky for the buyer, but that is only true in instances where construction is still due. For constructed properties, paying the cost upfront can offer many benefits. This is a safer option for sellers as they get all the money upfront and can easily invest it elsewhere. Receiving money in installments often makes it very hard to reinvest the money.
- Get immediate ownership of property: In most instances, the buyer gets instant ownership of the place after paying the money upfront. This makes it a safer option for people looking to relocate houses. Immediate ownership means you can also resell the property and profit. In an installment plan, you are not legally allowed to sell the property before finishing all the installments.
- Allows you to enjoy more security: Having a home or business property can be a source of great comfort. The chances of this feeling worthwhile increase when you pay the entire amount in one go. It also ensures you don’t have to continue making compromises for the next couple of years to pay the installments on time.
- You get many discounts: Like buyers, developers also understand that paying a huge amount at the start can be challenging. Most developers will offer you significant 5 to 10 % discounts on the overall cost of the property. Since developers want to lure you in, they will be incentivized to offer greater discounts. You will end up paying less in down payment plans than you would in other plans.
- More for less money: When you pay in installments, you don’t realize that you end up paying more than you intended. With down payment options, you will pay the whole amount in one go without any burden of interest on loans or EMI costs.
What Type Of Payment Plan Is Best?
It is impossible to recommend one plan over another in the real estate market. Each plan comes with its fair share of benefits and flaws. Where investment plans allow you to give small amounts of money over time, down payment plans relieve you of any stress. Construction-linked plans may appear less risky, but time-linked plans offer more discounts. At the end of the day, the choice should reflect your personal desire and financial situation. Make sure you assess your finances before you jump to any conclusions.
