No experience - we always put 10% or more down. Several consequences:
1) Your payment will be higher

2) If you have less than 20% of your own money into the home, the bank will want you to have an escrow account. The escrow account will collect the ins and tax money from you by adding it to your payment, then they will pay the ins premium and the taxes. Some people don't mind that. I preferred to handle those items myself.

3)Did you compare interest rates for no down vs 10% down, vs 20% down? I'd bet that you will be paying a higher interest rate.

If you finance more than 80%, you will have to pay PMI, which is not tax deductible and is sometimes hard to get rid of.

When we bought our house, we put 10% down and took out an 80% first mortgage and a 10% second; the second mortgage was at a rate 3 points higher than the first. Within a year or so, we had accumulated funds to pay off the second, which we did.

Go to bankrate.com and check out all the rates and the calculators. You can compare a lot of different scenarios.

with no money down, it will be a long, long time before you have any worth while equity in your home since most of your monthly payment will be for interest. Should you have to sell the house soon, it may not bring enough to pay off your loan. You would still be liable for paying off the balance. The more you can put down, the better.

What do you plan to use the money for that's available but you're not choosing to use to pay for the house?

If you owe $150,000. at 6%, that's $9,000. per year.

If you owe $100,000. at 6%, that's $6,000. per year. Your mortgage is structured so that you'll be paying an equal amount monthly throughout its life.

In the early years, there's about $6,000./9,000. interest to be paid on that loan, and when you add the amount of your monthly payments, they're only a little bit above that.

So - that difference is all that'll be paid on the principal of the mortgage in that first year.

In the later years, if you're only owing, say $10,000., 6% of that is $600., so most of the difference between that amount and the total of your monthly payments go to pay down the principal.

In the early years, if you can make an extra month's payment amount, with the total amount going to pay down the principal, likely it'll pay off more of the principal that was paid off by all of those 12 monthly payments, as most of that year's payments were needed to pay the interest on that large amount still owing.

As someone said, if the lender is carrying more than the total value of the house, unless you're paying real estate, inspection, lawyer's fees etc. in cash, the lender is carrying much larger risk than if they're paying 80% of the value, and you've paid 20%. So - to carry that increased risk, they'll probably want increased compensation in the form of a higher interest rate.

Usually, if you can pay 25% of the value of the house, you can avoid paying mortgage insurance, that'll pay off the mortgage if you're unable to do so.

If you need to carry mortgage insurance, most like to buy it themselves, as term insurance.

If you need to collect, the money comes to you, rather than the bank, who collects if they're the owner of the policy.

Also, the value remains constant, while mortgage insurance covers only the decreasing amount owing on the mortgage and probably costs as much or more than constant-value term insurance. The remainder goes to you or your loved ones. But it needs to be not only death insurance but disability, as well.

Good wishes as you do a study of the various aspects of the rules that govern mortgages - it'll likely be the largest purchase that you make in your lives, so you'd best investigate all aspects of it thoroughly.

If you borrow 100%, you'll pay more for the mortgage than you pay for the house.

Heavy duty money, that.

Important to know all the aspects of what you're doing ... before you sign. If you don't know what you're doing ... it gets much easier for some lender to take advantage of you.

Be sure to shop around for your mortgage, and examine all aspects of the contract. Maybe a mortgage broker can help you find a better deal. Paying 1/4% more for 15-20-25 years adds up to a lot of extra dollars.

Naivete sometimes (frequently) carries a heavy price tag.

ole joyful

Others have made some good points, but, in order to really answer this, it's essential to know: What's your interest rate, is it fixed, and what are the fees? The pros and cons are essentially theoretical points if it's a bad deal. Provide some specifics and it will be easier to tell you whether it makes financial sense.

Hi Maria,

My DH and I are in the process of buying a home, and we were approved for 100% financing. No money down. Even though we do have money to put down, I was wondering the problem I may if we don't put anything down? If any?

Do you have sufficient safety cash reserves set aside to cover a full year (12 months) of all of your living expenses, including the new proposed mortgage principal, interest, taxes & insurance?

If you have less than that, then there is a HUGE check mark in favor of 100% financing (no down payment... if still allowed, since the implosion of the mortgage biz these last several weeks.)

If the actual INTEREST charges (not the total payment, but the interest as a ratio of principal) decrease by a very good chunk for a 5% down payment... then that *might* be worthy of consideration... but ONLY if your income streams are such that you know you'll recoup that cash and rebuild up to a 12 month safety reserve again within 60-90 days (at the longest.)

In the beginning (well, always actually,) remember; Cash Is King! You can't eat real estate equity, and you can't pay the bills with it either.

After you have sufficient reserves... the NEXT major target is your employer-matched retirement investments (do NOT miss a single dollar toward these unless you are sucking dry on your reserves! DO NOT pay more to the mortgage if you have not taken all your employer-matched investments!)

After that, max out your qualified retirement plans, or their equivalents (IRAs, 401(k), 403(b) etc.)

ONLY AFTER THE ABOVE has been managed... ONLY THEN does it make sense to CONSIDER adding down payment, and/or paying more toward your mortgage principal... and even then there are potential alternatives that can sometimes be to your advantage.

LUCK!
Dave Donhoff
Strategic Equity & Mortgage Planner

I wonder what interest rate was being considered?

Renegotiable a couple of years or so later, at a higher rate?

ole joyful

You most likely will pay higher interest rate if you put nothing down.

We are financing 100% of our loan precisely because of the issues Dave outlined above. Our situation is a little different because we are doing a VA loan, so we don't have to worry about PMI (I wonder if anyone other than VA eligible people can still get 100% financing anymore?). The loan is 5.5% fixed and the appraised value is 10k over the amount we're financing, so we'll have a little equity, but I wasn't counting on that when we decided for full financing. I just want to have cash on hand for home repair/emergencies, and having it available helps me sleep a little easier at night (especially when we will be heating the home with oil and energy prices are making me a little antsy atm, LOL).

We also have a unique situation here with retirement as we don't pay into social security at all (husband works for the University of Alaska and we are opted out of social security). Because we are totally privatized, we are working to maximize our retirement savings. Luckily the University provides a nice matching system. Husband contributes 7% of his gross pay to a retirement fund and the U adds another 17% of his gross pay. So, for a contribution of 7%, we end up with 24% invested every year.

One of the things to consider with a VA is that there are fees associated with the VA loan, a funding fee, etc which helps to cover some of the risk for the loan. How this differs from PMI is that it is financed as part of the loan and thus you are paying interest on it. With PMI, if the house appreciates and puts you over having 20% equity, you can drop the PMI. The funding fee is always yours.

Dh's parents had VA loans, financed 100% of their house plus the closing costs. They had to write a check in order to sell their house. It can happen. My Dh could have used a VA loan but because of the extra fees associated with it, it would not have been a good deal for us b/c we owned our lot free and clear and it appreciated rapidly. I have to say, I detest mortgage financing. Yuck!

Greetings again, Ma28,

... did you buy the house, early in '07?

If not, if your area is similar to many others, you could probably buy it or a similar one for quite a lot less money, now.

Also, you'd have had a year to have built up an emergency fund of 3 - 6 mos. or a year of income in case of emergency ... or replacement money in case of loss of employment.

Also, possibly, an additional amount available to make a down payment on a (quite likely lower total cost) home.

Many U.S. people a couple of years ago and for a while before were offered 100% financing ...

... plus current interest payable percentage of 1.5% or so ...

... with the other, perhaps 4%, being added to the amount of the mortgage.

With rate to be adjusted later.

At which time many purchasers, being asked to pay 5% or so, were unable to do so, so the house had to be sold.

In the meantime, the lenders peddled those mortgages (after having an investment rating service give them a high rating).

A canadian bank in which I've held shares for over 40 years was involvled in those mortgages ...

... plus backed an insurance company insuring many such mortgages, which may have to go bankrupt.

Their share price dropped from $106. to, at one point, and temporarily, $59. and change ... now recovered to about $68.00.

So I have been a very unhappy camper for several months.

ole joyful

Hi Maria - when we bought our house, we put 10% down. We had to pay PMI at first but since our credit was good it wasn't very expensive (approx $75.00/month). We then made an extra mortgage payment every six months. Once we gained equity, we had the bank drop the PMI.

When you do 100% financing you gain equity very s-l-o-w-l-y. And, in my view, too slowly - at least in normal markets. When you go to sell, you might have to dip into 401k money (which is a very costly thing to do) just to get out of your house. And, if you haven't put any money away at all you could get yourself into some real financial hot water.

Hi Busymom2006,

When you do 100% financing you gain equity very s-l-o-w-l-y. And, in my view, too slowly - at least in normal markets.

This is a misperception. How much down payment you engage into your real estate has no effect on the rate of appreciation in your market whatsoever.

When you go to sell, you might have to dip into 401k money (which is a very costly thing to do) just to get out of your house.

And, all else staying the same, if you buy the same house *AND* put more down payment into the process, you'd be raiding that expensive 401(k) money from the beginning, which (all things considered) would be a worse thing to do than ot not do so.

And, if you haven't put any money away at all you could get yourself into some real financial hot water.

SO... The issue in your post isn't whether 100% financing is good or bad, but rather;
A) That you don't buy more home than you can legitimately afford,
B) That you don't buy more home than you legitimately have reserves to support.

Neither have anything to do with the degree of leverage chosen.

It's just important to keep the accurate focuses on the accurate issues considered.

CHeers,
Dave Donhoff
Leverage Planner

Hi Dave -

I realize that down payments don't effect appreciation. But, don't they help build equity?

With regards to 100% financing: during the boom people made tons of money off of highly leveraged real estate investments. As long as there was rapid appreciation, people were o.k. They could sell their homes whether they had money in reserves or not.

Now that the bubble has burst, we are finding that many highly leveraged homeowners have failed to build or maintain reserves. Many are left with mortgages they can't afford and homes they can't sell because they have no equity or reserves. Now they are facing short sales or even foreclosure.

There is nothing wrong with using leverage to build wealth. 100% financing may work very well for the experienced investor. But, I don't know that these types of loans are right for the average homeowner. Especially in today's market.

Hi Busymom,

I realize that down payments don't effect appreciation. But, don't they help build equity?

Newp... down payments already ARE their own equity. Taking the funds out of one account and sticking them into your real estate equity account is simply transferring the equity from one pocket to the other (with various consequences.)

You lose the returns the money was earning in one account, and you save the rate of interest you would have paid on those funds if they were borrowed for the home purchase... and you also lose the safety of the liquid reserves.

With regards to 100% financing: during the boom people made tons of money off of highly leveraged real estate investments. As long as there was rapid appreciation, people were o.k. They could sell their homes whether they had money in reserves or not.
Now that the bubble has burst, we are finding that many highly leveraged homeowners have failed to build or maintain reserves. Many are left with mortgages they can't afford and homes they can't sell because they have no equity or reserves. Now they are facing short sales or even foreclosure.

THis certainly supports the case for;
A) Keep more reserves (espeically rather than burying them into real estate equity, which could go away in a softening market,)
AND,
B) Don't buy more home than you can realistically afford to maintain (which isn't affected by a temporary softening of prices, since your affordability doesn't change by re-sale prices after you are an owner.)

There is nothing wrong with using leverage to build wealth. 100% financing may work very well for the experienced investor. But, I don't know that these types of loans are right for the average homeowner. Especially in today's market.

This is a meaningless paragraph.
Yes, there is nothing wrong with leverage.
Yes, 100% financing can work well.
Yes, you don't know something about "these loans."
Today's market... as opposed to?

Once again, it appears that you're carrying tightly to certain misperceptions and assumptions that you are burying unstated into your communications. You are likely also bringing these confusions to bear in your own financial life as well.

Re-read the thread above with a critical eye... it is telling.

Cheers,
Dave Donhoff
Leverage Planner

Hi Dave -

I don't think I'm that confused, really.

The biggest problem I have with 100% financing is that it tends to appeal to the people who could not otherwise come up with a down payment. If they can't come up with a down payment, they are not going to have any reserves on hand when it comes time to sell. And when homeowners have no reserves or equity, short sales and foreclosures happen. That impacts everybody. Even the people (like me) who have their finances in order.

MA28,

You need to consider what types of issues you may have in owning a home repairs, utilities, etc. you can make an estimate what you need. you didnt mention age of home and price but you can figure 2-5% of the purchase price for maintenance issues.

in this market enviornment i would still put something down to increase the equity in your home and maybe avoid PMI. you should definitely keep some money in the bank.

what is your timeline in staying in the home? are your jobs secure? are you aware of the serious risks in 100% financing? you havent given much information into your situation.

either way i would NOT do a 100% financing for the simple reason of the closing costs (unless you are paying in cash) for buying and selling in the future plus RE comission.

Hi Busymom,

Here's where your confusion is actually coming from;

The biggest problem I have with 100% financing is that it tends to appeal to the people who could not otherwise come up with a down payment.

Your confusing the financing methods with the character of some of the people who are drawn to it. The strategies themselves are inanimate... they offer nothing to be opposed to, logically.

If they can't come up with a down payment, they are not going to have any reserves on hand when it comes time to sell. And when homeowners have no reserves or equity, short sales and foreclosures happen. That impacts everybody. Even the people (like me) who have their finances in order.

There are plenty of very responsible people who use leverage of all types quite effectively.

Your issue is with the irresponsible people (and rightly so.) Blaming the financing strategies or programs for financially irresponsible people is as useful as blaming the skies for the rain.

You can protect children from themselves, but you cannot protect immature adults in our society (without penalizing the mature adults... the very group we wish to encourage!)

Cheers,
Dave Donhoff
Leverage Planner

Hi mnk716,

either way i would NOT do a 100% financing for the simple reason of the closing costs (unless you are paying in cash) for buying and selling in the future plus RE comission.

Here's a thought;

If a person is really concerned about making sure they can aford to sell their home when that time comes... their equity is much safer in a seperate account (checking, savings, CD, money market, etc.) than having been entrapped in a softening-value real estate parcel.

You can't count on cash from equity that's gone away in dropping home markets.

Cheers,
Dave Donhoff
Leverage Planner

Dave-

A simple credit check and a complete summary of a person's debts and assets can help a bank determine whether or not a person is worthy of a mortgage loan. And someone putting 0 down should be a virtual financial saint, indeed!

There is no need to penalize responsible people - they've done nothing wrong. There is simply a need for more selective lending standards. And that is the responsibility of the lenders.

Hi b-mom,

There is no need to penalize responsible people - they've done nothing wrong.

Yep, agreed.

There is simply a need for more selective lending standards. And that is the responsibility of the lenders.

Indeed! Responsibility of the lenders, responsibility of the borrowers, responsibility of the investors putting their money behind the lenders...

Looks like we've made great headway together in this thread!

To recap;
Neither "loan programs" nor "100% financing" can be blamed for the irresponsibility of people who use them poorly.

There are financially capable people who use flexible leverage terms very successfully, and there are incapable, irresponsible people who do not. Penalizing the responsible in order to protect the irresponsible from themselves is a bad idea.

Equity is simply recognized as equity, regardless of where it is held (checking, savings, securities, cash value contracts, or real estate.)

Down payments are only a benefit to the bond buyer (the investor giving their money to the lenders) and not the adult, mature homeowner.

Down payments lose the interest/investment returns they were previously earning (or that potential,) and save the relative rate of interest they avoid in tax-deductible mortgage loans.

Down payments are a reduction of safety liquidity.

Down payments (or the lack of them) have zero effect on appreciation of equity. Equity (total family equity) only increases when the property itself appreciates... otherwise loan paydown is merely shifting dollars from one interest-earning pocket into the other interest-saving (except riskier) pocket...

The worst place to "store equity" for a future potential real estate sale... is in the equity of the real estate itself.

When banks fail, the public suffers. Banks are responsible for their own due diligence to protect their stability, their safety, and the safety of the funds that the public bond-buyers provide to them for lending and banking purposes.

It was a GORGEOUS day here in the Pacific NorthWet! Hope yours was beautiful as well!
Dave Donhoff
Leverage Planner

Dave-

"When banks fail, the public suffers. Banks are responsible for their own due diligence to protect their stability, their safety, and the safety of the funds the public bond-brokers provide to them for lending and banking purposes."

I may be misunderstanding you, but -

Are you saying that mortgage originators/brokers are blameless in this whole mess? I've heard and seen horror stories about McDonald's employees earning less than 35k a year being marketed 500K loans with no money down and 100% financing. Some have even been able to buy multiple homes.

Many neighborhoods have been filled with these types of buyers and are now suffering the consequences of every one of those loans going bad - because they were bad loans from the get go and those brokers knew it. But they chose to pad their pockets anyway.

We've also been having a beautiful week. It rained yesterday but nothing too bad. I love summer!

If you have to use 100% financing to buy a home then the OP either is buying too much house or should not be buying at all until there is sufficient cash reserves for both down payment and cash emergencies.

banks like to see down payments because it protects them from future losses since they are not financing the full purchase price.

with 100% financing the homeowner is hoping appreciation will eventually offset the mortgage amount. this may be true but only after some time (>5 years). since most homeowners sell within 7 years this is taking a chance given the closing costs and RE commission.

Hi b-mom,

I may be misunderstanding you, but -
Are you saying that mortgage originators/brokers are blameless in this whole mess?

No way, not in the least am I exempting the originators/brokers/lenders from their degree of responsibility. There was a great deal of fraud that occured and loose reviews that didn't seem to watch for them too closely, and that was (and is) always wrong.

Aggressively marketing (as long as legally done) the financial programs that the investing bond-buyers demanded of the lenders... there is no blame to be pointed at the originators in that direction. In that asepct they were simply doing their job as the industry demanded and incented.

I've heard and seen horror stories about McDonald's employees earning less than 35k a year being marketed 500K loans with no money down and 100% financing. Some have even been able to buy multiple homes.

That would certainly be more of an implication against the Big Mac'er than the originators... the lenders were never allowed to force anyone into their financial offerings.

Many neighborhoods have been filled with these types of buyers and are now suffering the consequences of every one of those loans going bad - because they were bad loans from the get go and those brokers knew it. But they chose to pad their pockets anyway.

Actually, you are giving wayyy too much cognisant credit to the brokers as having the financial sophistication themselves to "know" that a loan would be bad or good. Realize, the tier of loan officer (ESPECIALLY retail loan officers, the likes you would find at your glass & marble 'neighborhood bank') had (at that time) a very low entry threshold... it was even easier to become a loan oficer than a real estate agent... last week's Blockbuster store clerk was yesterday's "Loan Consultant" (and is once again today's grocery bagger.)

FORTUNATELY (at least in some ways fortunately,) the thresholds of entry have skyrocketed almost overnight in most jurisdictions...

NONETHELESS, loan officers were compensated and trained strictly to find consumers who fit into the underwriting guidelines they were provided by the back-end lenders and investors. Loan officers (even if they were indeed smart enough to know how,) were not paid to second-guess the underwriting guidelines of the lenders themselves.

Most of these 'loan officers' were no more sophisticated than the McDonald's employees you bring up (and in many cases less so,) so we have to lay responsibility among the feet of everyone involved, especially those stepping into the financial commitments with signed representations making claims about their finances certified as being true.

=============================================

Hi mnk,

If you have to use 100% financing to buy a home then the OP either is buying too much house or should not be buying at all until there is sufficient cash reserves for both down payment and cash emergencies.

If you'll scroll up, you'll see that the OP did NOT have to use 100% financing, and had sufficient reserves (or at least we have to assume so, since she also said she did have funds that COULD be used as down payment.)

with 100% financing the homeowner is hoping appreciation will eventually offset the mortgage amount. this may be true but only after some time (>5 years).

This is impossible... no amount of appreciation can ever offset the mortgage unless/until it is eventually paid down. Appreciations, in & of itself, doesn't eliminate debt.

since most homeowners sell within 7 years this is taking a chance given the closing costs and RE commission.

Taking "a chance" of what? Of not having accumulated enough appreciation to equal the exit costs of a sale?

Again, the LEAST safe place to save closing costs for an eventual sale is in the equity of the real estate you are planning to sell. It is far safer to reserve those funds in a secured account that isn't subject to free market value fluctuations as real estate can easily be.

Cheers,
Dave Donhoff
Leverage Planner

Dave-

If the bag boy "loan officer" didn't understand the loan, why would the Big Mac borrower?

Somebody hired and trained that "loan officer." Somebody rounded in that borrower. I don't believe for a minute that these loans kinda just happened between two fools who didn't know any better.

The lack of ethics (both business wise and personal)is just astounding.

Hi b-mom,

If the bag boy "loan officer" didn't understand the loan, why would the Big Mac borrower?

They wouldn't... neither did... but only one of them was making direct financial commitments under certified oath. The one applying with certified statements of truth, having 3-6 weeks of "thinking about it"time, and then signing their name to the agreements for up to millions of dollars would naturally be expected to hold a significantly deeper responsibility, in my opinion.

Somebody hired and trained that "loan officer." Somebody rounded in that borrower. I don't believe for a minute that these loans kinda just happened between two fools who didn't know any better.

I'm not sure what you *DO* believe... but there were lots and lots and lots of financially simple fools involved.

The lack of ethics (both business wise and personal)is just astounding.
Completely agreed, wholeheartedly.

Cheers,
Dave

Believe me, I totally agree: without the blatant use of "financially simple fools", home values never could have gotten so inflated.

The 'bag boy/loan officer" didn't have to know anything more than that the BIG loan gave him a BIG commission.

Dave, is it true that you finance your underwear? Your dog is a rental? LOL

Hi Chisue,

That's cute... you mentally imagining me wearing underwear! LOL! (My rent-a-dog does though... its frilly & lacy, naturally!)

'Ta!
D

We built a house last year and while we didn't technically do 100% financing, we didn't put a penny down. The house cost was 20% less than the appraised value thereby creating "instant equity." So we used our "instant equity" as a down payment and also avoided PMI and no escrow accounts. The equity from our previous house went to paying off our remaining debt and the rest was socked away.

Our builder ended up screwing us and leaving the house unfinished (with money in his pocket) and we are finishing the house ourselves out of pocket. If we had made a down payment, I think we would have really been in a pickle.