Traditionally when you purchased a home you would only qualify for a mortgage if you could afford a down payment that would be equal to a certain percent of the purchase price. Lenders are changing those rules to allow more people to buy their own homes.
If you want to buy a house but you don’t want to liquidate assets for a down payment, this type of loan might make sense. For example if you own stock and would have to sell to put a down payment, you might get hit with short term gains taxes. By holding on to the stock and financing 100% of the home cost, you gain a tax advantage by having a higher interest deduction and avoiding the taxes from sales of an asset.
Benefits of 100% Financed Mortgages
This type of loan is also appealing to young professionals who are just starting out in their careers. They haven’t been in the work force long enough to save up a down payment but they’re confident in their long-term earning potential. This type of loan would allow them to get into a home right away.
Another scenario where this makes sense is when parents want to help out their children with purchasing a home. If the parents have assets that they don’t want to sell but are willing to put up as collateral, lending institutions will allow the home purchase to be financed 100%.
You might also consider this type of loan if you have some money to use a down payment but you want to invest in repairs on the home you are purchasing. By financing the entire purchase price and then using your cash to improve the property you increase its value and gain equity.
The danger with this type of loan is that you’ll be committing to payments that you can’t meet. If you weren’t able to save up for a substantial down payment chances are that you’re living with very little financial cushion. One setback, getting laid off or sick, could mean that you won’t be able to meet the payments.
Another possible problem with this type of loan is that you won’t be able to sell your home if there is a downturn in the housing market. If you don’t have any equity in your home and then real estate prices drop, you could owe more than the house is worth and it would cost you money to sell your home.
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