Traditionally mortgage lenders required a substantial down payment. This reduced their risk because right from the beginning of the loan life, the buyer had some money at risk.
But lenders are getting more creative and opening the market to people in non-traditional circumstances. A no-money or zero down loan can be a way to keep other assets and still take on a mortgage. For example if you have stocks that you want to hold on to, they could be used as collateral for the loan, instead of having a down payment.
Some lenders will give no-money down loans to recent college graduates who are just starting professional careers. Everyone involved is betting on the long-term earnings potential of the buyers.
These types of loans do have extra costs. The interest rates tend to be higher and some sort of loan insurance is usually required. Both of these items can increase the monthly payments.
Another factor to consider before you take on this type of loan is how long you plan on keeping your home. If you want to sell in less than 5 years this may not be a good choice. If the housing market goes flat or even falls, you could owe more than your home is worth. That would mean that if you wanted to sell and move you’d have to either keep paying on a house you no longer owned or come up with the difference between the mortgage amount and the selling price.
One circumstance where it would make sense to take out a no-money down loan, even if you have money for a down payment is if you wanted to invest the money in improvements. The improvements would increase the value of the home. If they are the right types of improvements they could increase the value more that the cost of the work and materials.
No Money Down Loan Options
There are many different types of loans and how much money you put down is just one factor. There are adjustable rate mortgages that have a low introductory rate that’s fixed for a period of time. It might make sense to put some money down and then get a lower initial rate so that your monthly payments are lower rather than go for a higher amount with a fixed rate.
Taking the time to think about your long-term financial goals before you shop for a loan can pay off in the long run. Sometimes sales pitches sound good but after you work out the numbers they are less attractive.
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