Buying With Little or No Down Payment

We know many homebuyers have a difficult time saving up for a down payment. While this is true of first time homebuyers, it is true of repeat homebuyers as well. Age, level of income, and level of debt are all factors that have an impact on the ability to save up for a down payment.

There are many lenders that recognize that eligible borrowers would be denied for a home mortgage if the traditional 20 percent down payment rule were enforced. Perhaps this is why lenders have begun offering programs to homebuyers that have little or no down payment.

This provides hope for many homebuyers since it removes the stress of trying to save up such a large amount of money. Even though the homebuyer gets a break from saving for a down payment, there are extra costs included in the mortgage that, over time, might end up exceeding that 20 percent down payment.

In some cases, lenders increase the mortgage interest rate for borrowers that do not have a large down payment. You might wonder how the lender could do this. Many lenders have found evidence that borrowers that make a lower down payment are higher risks for defaulting on mortgage loans. For this reason, lenders have begun assessing a higher interest rate on these borrowers than those who do have a down payment. Think of it as the cost you incur for not having down payment. Ultimately, the same mortgage costs you more when you don’t have a down payment than it would if you had.

Private mortgage insurance is another cost that you incur when you make little or no down payment on your home. This insurance, also called PMI, may be required by the lender when you make a down payment that is less than 20 percent of the price of the home. This insurance is designed to protect the lender in case you default on your loan. If you are unable to pay your mortgage, PMI pays your lender.

The amount that you pay for PMI will depend on the purchase price of your home and the down payment you make. The lower your down payment the higher the PMI will be.

The good news is that you can cancel PMI once your mortgage payments and price appreciation have gained you 20 percent equity in your property. At this point, the lender deems you are at a lower risk of defaulting on the home loan. Make sure you remain current on your payments so that you are able to cancel the insurance once you have reached 20 percent in equity.

Obviously, the ability to purchase a home without a down payment comes at a cost and it has become increasingly difficult to find low and no down payment loans. The increased interest rate and private mortgage insurance increase the monthly payment you have on your mortgage.

If you want to avoid these extra costs, take steps to save up as much of a down payment as possible. Even if you aren’t able to completely eliminate these costs, reducing them is still a viable solution.