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 Hundreds of books promote the concept of buying a home with "no money down" or zero down payment.
| Don't even think about it ! |
| No money down is for hotshot investors who have tons of free time and don't care about location. |
| A home in a neighborhood where you want to live will most likely require a significant cash down payment. |
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Most homes are purchased with cash plus a mortgage loan. The cash is mainly for a down payment but a small amount is needed for closing costs. The mortgage loan covers the difference between the purchase price and the cash down payment. |
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The following is a simple example of our calculators |
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Mortgage lenders know that if you put your entire life savings of $20,000 into a $100,000 house... |
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-- you are not likely to take off to the South Pacific and leave them with the house and your $20,000. |
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| The lowest interest rates and lowest fees are reserved for buyers who can come up with a 20% cash down payment. Buyers who put up 20% also avoid the additional monthly cost of mortgage insurance*. |
| *mortgage insurance: pays the mortgage lender in case of home-owner's death, bankruptcy or other failure to make payments. |
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Homes can be bought with as little as 5% cash down payment, but mortgage lenders worry... |
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-- if you put up only $5,000 while they put up $95,000 for that $100,00 house, |
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-- you might flee the state or go home to Momma at the first hint of financial problems. |
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| Expect to pay higher interest rates and higher fees for mortgage loans when your cash down payment is less than 10% of the purchase price . |
| A low down payment also means higher monthly payments which can stress your ability to pay other bills. |
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How do you assemble $40,000 in cash for a 20% down payment on your $200,000 dream house ?
| Sell your current home and recover at least $40,000 in equity. |
What if this is your first house?
- Save the bulk of your salary - put it in a money market fund.
- Borrow from parents or grandparents.
- Get a partner:
Spouse or friend with income and cash.
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Remember: most people own several homes in a lifetime. The "dream home" is often the third or fourth home.
- Buy something smaller than your dream house.
- If the dream house has five bedrooms and a library, start with 3 bedrooms and make one into a library.
- Pay down the mortgage loan and build equity for a bigger down payment on the next house.
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Danger: There is no shortage of brokers and lenders willing to convince you that you can afford that dream house now. Beware of:
- Adjustable rate mortgages that start with low monthly payments that can quickly grow beyond your ability to pay.
- Interest only loans where monthly payments do nothing to reduce the amount owed on the mortgage loan. You build no equity and at the end of the term you still owe the entire amount of the loan
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The most common mistake is to buy a home at the limits of your finances.
Most of us need to focus on mortgage amounts less than the maximum a mortgage lender will lend. Unless confident that your income will be increasing sharply, don't accept a mortgage more than 80% of the maximum that mortgage lenders will give.
If lenders are willing to loan $160,000, plan on a $130,000 mortgage (about 80% of the $160,000) and a house costing no more than $155,000.
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Equity
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| The Homeowner's equity is the value of a property minus the unpaid balance on mortgage loans or other liens*. |
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If a home can be sold for $100,000, and the balance remaining on the mortgage loan is $60,000, the owner's equity is $40,000 ($100,000 minus the $60,000 to pay off the mortgage loan).
If $2,100 is owed to a contractor for a new roof or deck, the owner's equity is $37,900 ($40,000 minus $2,100 the contractor might attach as a lien to guarantee payment). |
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Owners build equity by paying off mortgage loans. |
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If a home can be sold for $90,000 and there is no outstanding mortgage loan, the owner's equity is $90,000. There is no loan to be repaid so the owner gets to keep the entire $90,000. |
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*other liens: usually money owed to contractors such as painters and plumbers who claim they have not been paid by the home owner for work done. |
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