Mortgage 101: The Pros and Cons of Zero Down
So You’re Ready to Buy a House… What’s Next?
As you’re probably already aware, you don’t actually need a 20% down payment to qualify for a mortgage. In fact, there are programs that will allow you to buy a home with as little as 3.5% down, and a select few mortgage programs, such as those available from the United States Veterans Administration and the U.S. Department of Agriculture, can even get you into a mortgage with zero down. Even if you don’t qualify for a VA or USDA loan, you may be able to receive help from down payment assistance programs such as Community Seconds, which is a low or no-interest second mortgage initiative designed to make homeownership more affordable.
The idea of achieving homeownership with little to no down payment is definitely appealing. Having said that, there are certain drawbacks that those who utilize low-down-payment programs may encounter. Let’s take a look at the pros and cons of purchasing a home without a down payment.
A Lower Bar for Homeownership
The advantage of low down payment mortgages is readily apparent: you can purchase a home without having to save up for a hefty down payment. For cash-strapped people who reside in markets where rents are increasing faster than home values, this is a big plus, and for many would-be homeowners, these programs are the only viable paths to homeownership. Assuming they can make good on their mortgage commitments, they’ll likely eventually find themselves in a much stronger financial position than they would have if they had continued to rent.
Zero-Down Potential Pitfalls
While these programs make homeownership more affordable to those of lower means, they also come with certain disadvantages. FHA loans, a popular choice for first-time homebuyers, allow down payments as low as 3.5%, but they require mortgage insurance throughout the duration of the loan. In contrast, conventional mortgages only require PMI until the loan-to-value ratio has reached 80%. Through appreciation or diligent payment, conventional mortgage borrowers can reduce their monthly payments over time. Not so for FHA borrowers, and further, FHA products also require a substantial up-front premium. VA loans are an option for veterans and active duty service members, and they do not require a down payment or mortgage insurance. The downside, though, is that not paying a down payment puts the homeowner in a position where they have zero equity until their property appreciates.
Equity Matters When Taking on a Mortgage
Why does equity matter? Well, homeownership can get quite expensive if the need for unexpected repairs arises. Many homeowners use home equity loans or lines of credit to pay for new water heaters, roof repairs, and other substantial expenses. Without the ability to borrow against equity, those costs must be financed via other, and often costlier, means.
Another issue with zero-down loans is that homeowners may find themselves “upside down” in their mortgages if the housing market takes a turn for the worse, as it has the proven potential to do. Owing more than your home is worth is not a pleasant situation, especially if you happen to lose your job when the economy loses its footing.
There is also the matter of the monthly mortgage payment. The more you finance, the higher your monthly payment will be. And every dollar that you don’t put down is a dollar you will have to pay interest on later.
Are Low Down Payment Mortgages Right for You?
Yes, you can buy a home with very little money down, but should you? Well, that depends. If you really want to own a home and can afford the monthly cost, but can’t manage to save up for a down payment, then one of these low up-front mortgage options may be the perfect fit for you. Then again, if you don’t have the cash flow or discipline to put away a little bit extra each month, then you may want to take a long, hard look at your overall financial wherewithal and figure out whether or not you’re really ready for the expense and commitment that homeownership entails.
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