During the start of what turned out to be the housing bubble, many people heard stories about “no money down” mortgages, and how they were what “everyone” was getting. Although they are not as well publicized today as they were ten years ago, there are still lenders and lending options which don’t require a substantial – or any – down payment.
For many prospective home buyers, coming up with 20% of the purchase price in cash, plus additional cash on hand for closing costs is a high bar to reach. If you’re interested in purchasing a home for $250,000, that means having more than $50,000 on hand and available for use as a down payment, which is just not an amount that many people have available. When you factor in closing costs, which can average between about 2% to 5% of the purchase price of the home, you’re looking at needing as much as $10,000 or more, in addition to the $50,000 for a down payment.
So, should you look into a no-money-down loan option? There are definitely pros and cons to no-money-down mortgage loans, and before agreeing to the terms of any loan, you should speak with a qualified mortgage specialist to see what option is truly best for you, in both the short term and the long term.
Pros to a no-money-down mortgage loan
The biggest pro to a no-money-down mortgage loan is obviously that you won’t be required to immediately pay out any of your savings, and that you may be able to buy a home that you otherwise wouldn’t have qualified to buy.
Additionally, because you are not potentially draining your savings account to purchase a home, it should be easier for you to build up an emergency fun. Emergency funds can be vital for when those unexpected financial burdens hit; which they do to all homeowners at some point. Draining your entire savings account to come up with a 20% down payment may put you in a risky financial situation short term, if you find you need additional cash on hand to pay for unexpected repairs or expenses.
Cons to a no-money-down mortgage loan
One of the biggest benefits to putting down a considerable down payment on your home purchase is that you will build instant equity in your property. When you put no money down, you start out with little to no equity in your home, and it will take you considerably longer to build equity in your home. This may end up being a big deal if you didn’t get the best or lowest interest rate on your mortgage, as many mortgage refinance programs require certain minimum equity thresholds in order to refinance your loan.
Additionally, in many cases, when you put no money down, you will be required to pay for private mortgage insurance, or PMI, on a monthly basis. PMI can be a substantial amount each month, a several hundred dollar a month fee on top of your mortgage payment, your insurance payment and your property tax payment.