ZERO-DOWN LOANS

By Tricia Morris,
President, Premiere Mortgage

Zero-down, or nothing down loans, can open the door to homeownership for first time buyers, singles, low-income buyers, the young buyer and others who may lack cash but have a good income. In a rapidly appreciating market, no-down loans can also give more buyers a chance to gain net worth from accumulating equity.

Since the federally chartered investor Freddie Mac introduced plans several years ago to buy qualifying zero-down conforming loans it is difficult to find a lender that does not have a zero-down home loan option. These loans are, however, riskier than loans with down payments, even while helping buyers get into homes they might have been priced out of in a market with rising prices.

At the onset, loans with nothing down are more costly than those that require a down payment. The interest rate and points are generally higher and there may be additional costs associated with the loan.

Because of the higher rate, or the need for private mortage insurance (PMI), or both, to get a zero-down loan many borrowers may actually wind up actually paying three percent to five percent down to get better rates.

In addition, to try and cash in on lower interest rates in order to preserve their credit and their home in a declining economy, a no-down borrower could face a penalty as high as three percent of the loan balance.

While the zero-down option can be attractive, it should be undertaken with a thoughtful review of both its benefits and possible downsides. The goal is to be an informed borrower. Examine your job situation clearly. Ask yourself if you can assume the risk of a possibility where you are unemployed and responsible for housing costs greater than your home value.

For example—at a time when a bullish stock market was rising rapidly from month to month—portfolio backed zero-down loans became popular. These loans allowed a borrower to avoid cashing in their stocks to come up with a down payment. In lieu of a down payment a loan could require that you hold securities equal in value to a certain percentage of your home’s appraised value, say 40 percent.

The risk is that if the value of your portfolio slipped—as happened in the fall off of tech stocks—then the value of your stocks in relationship to their percentage of appraised home value to could be breached, leaving you with the obligation to acquire additional stock collateral to make up the difference.

While zero-down loans have a place in a lenders and borrowers tool kit, and may be useful for various segments of the housing market, they should be examined in detail before the final decision is made to go ahead. One way to review your options is with a free consultation from your local qualified mortgage broker.

Premiere Mortgage has offices in Kihei, 874-8800 and Kahana, 665-8800.

Return