Seeking 100-percent home financing might seem like the best way to buy a house, especially if you're a little bit short of cash for a down payment. It also has some real drawbacks. With this in mind, 100-percent financing isn't necessarily something that you should jump into if you can find it.
Nothing Out of Your Pocket
With 100-percent down-payment financing, buying a home can be less expensive than renting. When you rent, you usually have to make some sort of security deposit and pay some fees. If you can finance your closing costs or get the seller to pay them and get into a house with nothing down, you won't have to put additional money into your housing, and you might even be able to skip a month's worth of payments.
To Infinity and Beyond
Financing with zero-percent down increases investment returns if properties go up in value. For example, if you were able to buy a $100,000 house for cash instead of financing it, and its value went up to $110,000, your $10,000 profit would be equal to 10 percent. If you put $20,000 down and borrowed $80,000 on the same house, your profit would be 50 percent, since your equity would go from $20,000 to $30,000 with the value increase in the property. If you used zero-percent financing, putting nothing down, and you got $10,000 in upside, it technically would be an infinite return.
It's All About the Benjamins
Not putting money into your house means that you effectively have more money left to keep elsewhere. You could choose to put away the money that you would have used for a down payment, creating an emergency savings fund, just in case something goes wrong. Another option is to invest the money in the home to make it a more pleasant place for you to live and, hopefully, create value in it.You could also invest the money in stocks or mutual funds where it might earn a higher return than it would in your house.
The Big House ... Payment
All things being equal, if you put 20 percent down on a $150,000 house, you'll borrow $120,000 and pay $662.64 per month in principal and interest, assuming a 30-year loan at 5.25 percent. The same loan with zero percent put down and a full $150,000 balance costs $828.31 per month. In addition, some low- and no-down payment loan programs also carry mortgage insurance premiums that can further increase your mortgage payment. As of September 2013, the maximum insurance premium for a Federal Housing Administration loan of $650,000 or less, which allows 96.5 percent financing, is 1.35 percent per year. This would add another $168.75 to a $150,000 loan's already-higher monthly payment.
Back to Infinity ... And Beyond
The potential investment benefit of 100-percent financing -- increased returns -- also comes back to haunt you if the property's value drops. If you have to sell a house that you bought with nothing down for less than you paid for it, you won't have any equity to absorb the loss. For example, if you buy a $100,000 house with $20,000 down and its value drops to $90,000, you can still sell it and have some money left over. If you have to pay 7 percent in commission and closing costs on the $90,000 sale price, you'll have $83,700 left to pay off your $80,000 mortgage. With no down payment, though, you'll have to show up at the closing table with $16,300 to sell the house and pay off your lender if you don't want to do a short sale.
- Department of Housing and Urban Development: Mortgagee Letter 2013-04
- ApartmentVestors: Leverage the Greatest Advantage for Real Estate Investors
- GoodMortgage.com: Closing at the End of the Month
- The Mortgage Professor: Mortgage Closing Date: Does it Matter?
- The Mortgage Professor: Invest Xtra Cash in Securities or Larger Down Payment?
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