Is Mortgage Financing a Good Idea?
What to be Aware of When it Comes to Financing a Mortgage.
Your bank offers them constantly - 0% financing, no money down mortgages! But is zero percent financing really as good as it sounds?
Well you’re not alone! According to the National Association of Realtors, four out of 10 homebuyers need to resort to zero percent home financing in order to purchase a home. Zero percent down on your mortgage means that the bank or lending institution will finance 100% of your mortgage – including your down payment. This option is tempting for those who have the money to make monthly mortgage payments, but maybe they don’t have the down payment, which is typically 10% to 20% of the price of the property.
For many a zero percent down mortgage loan is their only option. However full mortgage financing means the bank finances 100% of your property – which comes with its share of high interest payments and extra insurance, that will give the bank peace of mind just in case you can’t pay back the loan. You’re putting 0% down after all – do you really expect any lender to trust that you’ll pay off the balance of your mortgage?
In order to qualify for full mortgage financing you need a decent credit score and credit history. Even though lenders will differ according to their approval process for zero percent financing, they tend to favor borrowers with:
- No bankruptcies on their credit records in the last year.
- No foreclosures in their credit history within the last year.
- Proof of stable credit payments (on loans and credit cards).
- A credit score of at least 700.
- Any investments or cash savings.
- Additional assets – such as property, investments, jewelry or automobiles.
If your credit score is under 650, you may have trouble being approved for a zero percent financing mortgage. However, even though a traditional bank or lending institution won’t favor your application, a subprime mortgage lender might still approve you for 100% mortgage financing. Just keep in mind that a zero percent mortgage with a subprime lender means that you’ll be paying much higher than market average interest rates.
A mortgage with 100% financing already carries a higher interest rate than a mortgage that you put even a 5% down payment on. If you’re unsure if you can afford a deposit on the home you want to buy, crunch the numbers with your lending institution to see if you could afford as little as 95% financing (or 5% down). Sometimes even 5% down on your mortgage could save you a few thousand dollars overall.
Now that you understand the basics of 0% financing, let’s discuss the pros and cons of a zero money down mortgage…
The pros and cons of zero percent mortgage financing
The Pros:
- The monthly mortgage payments tend to be lower with a 0% down mortgage, then with traditional principal-and-interest mortgages.
- An ideal choice for individuals with no down payment.
- Gives borrowers that make a high income, but have no savings the opportunity to purchase a home.
- Zero percent down is an excellent option for those who have money tied up in other investments/property, and who don’t want to draw money out of their other assets.
- Allows potential homeowners the opportunity to purchase a more expensive home, when they don’t have to save for a down payment on it as well.
- A bonus for first time homebuyers who want some cash on reserve for other things (furniture, repairs, home upgrades, home essentials, etc.).
- Zero percent down means you can qualify for a more expensive mortgage. The lender will approve your mortgage amount based on your income – and if you can afford the monthly payment. If you have more money in savings because you don’t have to pay a deposit, it makes sense that you’d be approved for a higher mortgage.
- With a 0 down mortgage, borrowers can pay off a maximum of 20 percent of their principal annually – and without a penalty. If you’re income fluctuates during the year, this might be an ideal option for you.
Cons:
- Zero percent financing generally means much higher interest rates. This is because the lender will consider you a potential credit risk if you don’t put any money down on your home. They see you as a higher risk for default on your mortgage.
- You will have to pay PMI, or private mortgage insurance, if you put less than 10% down on your new home. The bank requires that individuals who put zero down pay the insurance in case they default on the loan. Remember you are considered a risk because you have put zero of your own money down. Paying PMI on top of interest can add thousands of dollars to your mortgage costs.
- I hate to stereotype, but individuals who need to apply for 0% down mortgages often have little or no savings, which means there is greater chance they will default on their mortgage payments and lose their home.
- Zero percent financing will trap you into paying the closing costs and real estate sales commission if you suddenly have to sell your home within the first 2 years – that’s if your home has made any money for you in home equity.
- A zero percent down mortgage is a bad idea for anyone who wants to pay off the principal of their mortgage quickly to increase the value of their home – say for resale 2 years after purchase.
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