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No Money Down Home Loans

By Edited Jan 22, 2016 0 0

For many people no money down home loans are a great way to be able to purchase the home of their dreams with out having to save up lots of money. While this is obviously a great thing many homeowners have ran into trouble with these types of loans over the last several years where they assume that they can make their monthly mortgage payments yet when interest rates rise their house payment has risen significantly, putting them at risk of not being able to make their mortgage payments. To avoid this kind of situation requires that you understand the benefits and drawbacks of using no money down loans, some of these different benefits as well as drawbacks include:

Pros of home loans with no money down

You can be able to purchase your house faster even with bad credit. No money down home loans may be the answer for you. In most cases many home buyers have to save up about 10% to 20% of the purchase price of the home before they can even consider looking. This means that young people and the elderly could be stuck in the cycle of trying to save up the money for a down payment for their first home. When you are purchasing a house with no money down you do not have to wait several years to save the money up for a down payment. Instead, you can start looking at homes and then when you find one, be able to qualify for the loan quickly, allowing you to realize the dream of home ownership.

There are no upfront costs: When you are signing up for a no money down mortgage there are no upfront costs. This means that any money that you have saved can be put into fixing up the house or purchasing a big ticket item with the new house. This effectively, increase the value of the house which you can benefit from.

Drawbacks of no money down home loan

You are liable for closing cost: When most people hear the word no money down they often assume that everything is included with that. The fact of the matter is that no money down home loans will allow you to finance 100% of the house. However, there are additional fees such as closing costs which you will be responsible for these would include: settlement fees, escrow deposits, real estate appraisal, and property inspection. In general, to be prepared for these kinds of costs you want to have at least 3 to 4% of the property value available at the time of closing to cover the different closing costs.

You have to buy private mortgage insurance: Whenever you are purchasing any home with no money down you will be required to purchase private mortgage insurance. This is a type of mortgage insurance that must be purchased when your mortgage amount is above 80% of the total purchase price of the property. What has happened in the past is many people have used no money down loans to purchase their homes, and then defaulted on the mortgage because they could not afford the house payment. To prevent this from happening you are now required to purchases private mortgage insurance so that if you default on your mortgage your lender is able to recoup the amount loaned to you. One way that you can be able to go around this requirement is to piggy back two different mortgages. This is when you have two different mortgages that will keep the overall amount loaned to you below 80% of the value of the property. For example, let's say that you decided that you wanted to purchase a home that is worth $100,000.00 if you finance 100% of it with one loan you will be over 80% requiring you to purchase private mortgage insurance. However, if you take out two mortgages for $50,000.00 each you are below the 80% requirement for each mortgage and do not need to take out private mortgage insurance.

Many no money down mortgages have variable interest rates: When you are using a no money down mortgage there is a possibility that it could have a variable interest rate. This means that when interest rates start to rise your mortgage payment is automatically reset. To avoid this kind of situation you want to make sure that the no money down home loan that you are using is at fixed rate, meaning that the financial institution can not reset your interest rate higher when mortgage rates are rising.

Clearly using no money down home loans is a great way to be able to purchase your home without having to save up the money for a down payment. That being said to decide if these particular types of mortgages are right for you it is imperative to compare the benefits and drawbacks to determine if they are ideal for your situation.

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