Is A No Down Payment Mortgage Right For You?
It's a terrific time to buy a home.
Sales are rising, supply is dropping, and prices have increased in many cities and neighborhoods. As compared to next year, today's market may look like a bargain.
Rates for 30-year loans, 15-year loans, and 5-year ARMs are cheap, which has lowered the monthly cost of owning a home.
However, it's not the monthly payment that scares off new buyers these days - it's the prospect of having to put 20% down.
Buyers are earning good incomes, but few have much saved in the bank.
The good news is that there are a bevy of mortgage programs requiring little or no money down and they're available to the general public - no hoops required.
Want to buy a home with little or nothing down? You can.
Home Buyers Don't Need to Put 20% Down
It's a common misconception that "20 Percent Down" is required to buy a home. And, while that may have true at some point in history, it hasn't been so since the advent of the FHA loan, which occurred in 1934.
The likely reason why buyers believe a 20% down payment is required is because, with one specific mortgage type - the conventional mortgage - putting twenty percent down means private mortgage insurance (PMI) is not required.
Paying PMI is neither good nor bad, but consumers seem to abhor it.
The purpose of private mortgage insurance is to protect the lender in the event of foreclosure - that's all it's for. However, because it costs money, private mortgage insurance gets a bad rap.
Because of private mortgage insurance, home buyers can get mortgage-approved with less than 20 percent to put down and, eventually, private mortgage insurance can get removed.
At the rate at which today's homes are increasing in value, a buyer putting 3% down would pay PMI for fewer than four years.
That's not long at all. Yet, many buyers - especially first-timers - will put off a purchase because they want to save a larger downstroke.
Meanwhile, home values are climbing.
For today's home buyers, making a down payment should be consideration, but it shouldn't be the only consideration.
This is because home affordability is not about the size of your down payment - it's about whether you can manage the monthly payments and still have cash left over for "life".
A large down payment will lower your borrowed amount and, therefore, will give you a smaller monthly payment to make each month. However, if you've depleted your life savings in order to make that large down payment, you've put yourself at risk.
When the majority of your money is tied up in a home, financial experts refer to it as being "house-poor".
When you're house-poor, you have plenty of money "on-paper", but little of it available for the everyday emergencies of life.
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