No Money Down….Not a good deal!

I’ve never been a fan of the “no money down” or even “low money down” concept for home purchases.  The ZERO (or little) down programs most often result in higher rates and higher fees.  The fees will more than likely be added to the mortgage.  This, in turn, makes it nearly impossible to gain any equity, and often results in negative equity.  I am of the belief that one of the positive things that has come out of the mortgage crisis has been the elimination of the ZERO down lending programs.  I believe you are better off to continue to rent, rather than purchase a home if you have less than 5% down.

Two main reasons for my thoughts.  First, if you’re going to purchase a home, shouldn’t you have some idea of whether you can afford the payments?  Time and time again, I’ve counseled people who paid minimal rent ($600 – $700/month) They had saved nothing.  Now they were looking to purchase a home in the $160,000-190,000 price range, with payments in excess of $1,500(including PMI).  How can they expect to magically have all this extra money each month?  Wouldn’t it make more sense to work up a $1500 budget each month…$600 goes to rent, $900 to savings, to see if it’s an affordable scenario?  Second, if that home appreciates (modestly 2%-3%) in value and sells for $175,000-$210,000 in three to five years, the borrower wins, right?  Probably not… after Realtor fees, closing costs, etc.,  the borrower probably has just enough to pay off that mortgage.  Had they rented… they could have SAVED (novel idea) enough money to put at least 5%, 10%, or even 20% (ideal) towards a mortgage, received a lower rate, less (or no) PMI, and had  REAL EQUITY in a property.  I’ve always heard people say renting is like throwing money away.  Buying with very little down, especially in the event of a declining real estate market is like throwing money away and stepping into the trash can with it!

My idea is simple… for (a minimum of) ten to twelve months put aside the extra $900  to see if you can do it… if you can, great, let’s buy a house!  Your rate is lower than it would have been with no (or little) money down, and you will build actual equity with more money going towards principal vs. higher rate and PMI fees.  With this example… if someone could save 10% on a $160,000 purchase ($16,000)  they would get the typical stated rate (assuming good credit) and begin with a mortgage of $144,000.  In four years, this mortgage should be paid down to $135,000.  Selling the home for $175,000 should net you approximately $160,000+ and you would actually have money coming back to you

Lenders look more favorably on lending people money when they have “real” equity into the collateral.  A person is more likely to make their payments when they have “real money” invested in their home.  Living within our means, and having real equity in our assets will take us a long way during tough economic times.  I’m all for home ownership, but I also believe that renting is a great alternative until you’ve built up a nest egg for a down payment.  It will save you thousands of dollars in the long run.

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