Are you or a loved one considering a no money down home loan? Before you go any further, take a look at these 3 Good Reasons to Avoid No Money Down Home Loans.
1. If You Have No Money For Down Payment, What Happens If Emergency?
If you are in the market for a no money down home loan because you have no cash saved up to put towards a home purchase, you are putting yourself in a vulnerable position. Do you have the money to cover unexpected moving costs, utility deposits, taxes, etc..? Financially, much more is involved in setting up a new house than just taking out a home loan.
And what happens if you purchase a home using no money down and three months later disaster strikes? Something major breaks in the home that is not covered by insurance.
You had no money to put towards the house to start with so where is money going to come from for repairs? Looks like you will have to take on even more debt. This cycle just might spiral out of control quickly.
Where no money is the reason for no down payment, continue renting and build a down payment and emergency fund.
2. If Considering No Money Down Home Loans Because Think Money Better Invested Elsewhere
I made a similar mistake one time. I thought our money could earn a greater return elsewhere than tied up in a mortgage. Also, I feared putting that much money in one place.
I convinced my husband to put down a smaller down payment than we could have afforded. Unfortunately this strategy did not payoff.
First, I did not realize that when you start making mortgage payments, the majority of the payment go towards interest. Over time the amount of principal paid with each payment will gradually increase with the interest portion gradually decreasing. This process takes time though, especially when no or little money is put down.
Second, I did not count on Private Mortgage Insurance (PMI) eating our lunch. When you make a down payment of less than 20 percent with many types of home loans, you are required to pay this insurance.
PMI protects the lender should you stop making payments on your loan. VA loans are one of the few types of loans that do not require PMI, but we did not have one of those.
Lesson learned. If you have enough money to make a larger down payment and still have a comfortable emergency fund, do so. The “Better Invested Elsewhere” plan has substantial pitfalls.
3.What Happens If Home Prices Decline And You Gotta Sell?
As mentioned above, when you have a 100% loan, for a significant amount of time your mortgage payments will mostly be going to cover interest. Only a small portion will go towards your principal balance.
If for some reason you get in a situation where you have to sell your home for less than you paid for it, you may owe a big lump sum payment to your home lender. You will need to pay this before you can be released from your loan.
If you cannot come up with the money, you may be forced into options that seriously damage your credit for years to come.
The three reasons above show why it is best to take a pass on those no money down home loans no matter how tempting they seem.
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