Home Loans with No Money Down
Filed Under Loans
Just about every time I turn on the TV on Sunday afternoon I find infomercials about some real estate “guru” who made millions buying and selling homes using none of his own money. Frankly, I find it hard to believe. First of all, if they were making so much money with their program, I don’t think they would waste their time and money trying to share this knowledge with others. It is through the home based business market that they are striking it rich, not the no-money-down buy and sell real estate business. That’s what my instincts tell me at least, but I thought there might be something to this no money down home buying. So I deecided to do a little research and this is what I found.
What are referred to as no-down-payment mortgage loans, are especially appealing to first time home buyers. This is because they remove the need to pay a 20% down payment. This is often the most daunting task the first time home buyer is faced with. It can take years to put away the $20,000 it takes to cover the down payment for a modest $100,000 home. Well, that is great that is makes it easier for people to buy their first home. There must be a down side, and sure enough, there is. If you choose to finance 100% of your home’s value then you are required by the lender to carry Private Mortgage Insurance or PMI. Private mortage insurance protects the lender if you are not able to make your monthly payments and default on your loan. There is usually a workaround for everything and there is a way around this requirement as well.
It is possible to finance a home with 2 mortgages. One for the down payment and one for the remaining 80% of the value of the home. These are often referred to as piggyback loans, 80/20 loans or a second mortgage. The advantages of a piggyback loan is that the lender will not require you to pay private mortgage insurance, because a 20% down payment has been made. This can be a significant savings depending on the cost of the PMI. The major disadvatage of 80/20 loans is that you have a to pay a higher interest rate on the second mortgage than you would pay on the first. If I were taking out this kind of loan, I would come up with a payoff strategy to pay this loan off as quickly as possible to save money on the extra interest you are required to pay.
My conclusion is that 80/20 loans are a better option than the no-down-payment mortage loans, but each person’s situation is different. If you are thinking about getting an 80/20 loan, then you should look into what it will cost you to carry private mortgage insurance. It may be that the mortgage insurance costs less than the added interest that you will carry on the second mortgage. When interest rates are on the rise the mortgage insurance will prove the better option. If interest rates are low then the second mortgage will the deal for you. It is also important to look ahead. You will be paying your mortgage and your second mortgage for years to come. Be sure to forecast many possible interest rate and real estate market scenarios so you are ready for whatever the next federal adjustment may bring.
