Unlike the pre-Recession era, it’s actually getting easier nowadays to get a mortgage with little to no down payment. Typically, a conventional home loan would require you to put down at least 20 percent in down payment. But programs such as USDA and VA loans, or the recently rolled out MAP by Movement Mortgage exist to extend credit availability to borrowers with limited down payment capacities.
But what are the risks of opting for a zero-down payment mortgage? Even if you are qualified, should you really take the plunge and go with the cheaper, easier way?
Know your options
The truth is you don’t really need to pay the full 20 percent conventional requirement on your mortgage. Some lenders allow as little as 3 percent in down payment. For a single-family unit that costs, $250,000, that would be a $7500 of down payment money. An FHA loan allows for a 3.5 percent down payment. So if you prefer to secure even a little equity on your home, it might be better to go for it or choose another mortgage option that serves you with down payment assistance.
The downside to paying less or none of the 20 percent conventional down payment requirement, however, is having a mortgage insurance on your loan. This secures the lender from the potential profit loss should you default on your loan in the future.
Typically, a private mortgage insurance costs around 0.5 percent to 1 percent of the entire loan amount per annum. Comparably, if you pay the requirement, you have good equity and save thousands on the supposed private mortgage insurance premium. This is not to say that you can’t get rid of private mortgage insurance throughout the life of the loan. After you’ve earned significant equity on your property, either via payments or appreciating home values, you can request for your PMI to be removed.
Of course, there are a lot more factors to consider when purchasing a home, not just the down payment. Your credit score plays a role as well and whether you have a steady, reliable source of income. But the thing is, your down payment amount also affects your interest rate. The more you pay, the better your rate will be which then translates to more savings.
Now is a good time to push the go button
Experts predict rates will rise soon. While it has hovered just below the 4 percent range for the last couple of months, the upcoming Fed meeting can break the trend and push it up so if you are planning to purchase or refinance, now is definitely a good time to lock.
For those stuck with the down payment problem, it is advised that you go ahead and push through with the zero to little down payment option, per the experts. If you delay for a year or two, rates could be significantly higher by then, outweighing whatever savings you’ve managed to put aside.
When debating over whether to pay a down payment or get the little to no down payment mortgage option, it’s important that you evaluate your financial situation honestly. You may have money to pay for the conventional down payment requirement, but will it not drain you financially afterwards? What other financial obligations do you carry? Calculate risk against benefit and choose the wiser option, with the long term in mind.