Is Zero-Down Financing as Good as It Sounds?
Courtesy of Credit.PrivacyMatters.comSM
"Get a home mortgage for no money down!"
If this pitch sounds familiar — and appealing — that's because it's supposed to sound that way. With corporate profits reaching new heights in recent years, there's a growing pool of financial resources just waiting to be invested in money-making pursuits. Because home values have risen steadily over the last sixty years, the home mortgage industry has emerged as an increasingly attractive investment opportunity.
All is not well, however, in the home mortgage industry — specifically in the sub-prime mortgage area. Every day, we have reports of rising interest rates forcing high-risk borrowers to default on their mortgages; the result is a corresponding rise in home foreclosures.
The unfortunate trend in the residential real estate market raises a lot of questions, particularly when it comes to zero-down financing. However, PrivacyMatters.com can provide you with some needed answers.
What is zero-down financing on home mortgages?
Zero-down financing is a type of mortgage offered to homebuyers who make no down payment (zero-down) and borrow the entire purchase price. Most buyers, particularly first-time homebuyers, are advised to put down at least 20% of the home purchase price. This initial payment reduces the size of the home mortgage and provides the buyer with immediate equity, or value, in the home.
In the simplest terms, zero-down mortgage means you haven't put any money into the home, and the mortgage lender holds the entire home's equity until you begin to pay off the non-interest portion of the loan.
What home value advantages does zero-down financing offer to the homebuyer?
Through zero-down financing, you can begin to invest in the future, putting money into property rather than paying a landlord rent each month and getting no financial return on your investment. Real estate has historically been among the most solid long-term investments available, and zero-down financing allows people with limited resources to start building up long-term equity earlier.
What home value disadvantages do zero-down home mortgages offer to the homebuyer?
People who can't afford a down payment are often unable to afford a long-term financial commitment. For instance, a costly injury or illness can drain limited resources and force a zero-down homebuyer to choose between making a mortgage payment or paying for healthcare and/or food and clothing.
Also, because high-risk borrowers often have weaker credit histories and lower credit scores, they are usually charged higher interest rates, which can increase the total purchase price by tens of thousands of dollars. Once the mortgage is paid off, they will own the home but they can't recover those additional costs.
Another expense of zero-down mortgages is often private mortgage insurance (PMI). Remember, PMI protects the lender — not the buyer. While homebuyers can request cancellation of the PMI once an 80% loan-to-value ratio is reached, they are required to pay the premiums until they do so. The cost of PMI is expensive, and the buyer receives no added value from these monthly premiums.
Are zero-down mortgages a good idea for everyone looking to buy a house?
The short answer is "No." As the saying goes, "Never bite off more than you can chew." Zero-down financing might be a good idea for people who have virtually guaranteed income for at least the next five years. That way, they could pay off enough of the mortgage — regardless of other expenses — to build equity in their home. But for many others, living within their means and saving up for a future down payment is probably the safer way to go.
