Jan 10 2008
What’s The Deal With The Zero Down Mortgage?
In some circumstances it is now possible to purchase a property with no down payment (infact in some circumstances you can get cash back, effectively borrowing over 100% of the properties value). Although this is heavily advertised by many banks and mortgage professionals it is not always advisable and may be a poor financial decision. While there are circumstances when you’re best decision is to buy a property with zero down, if the market shifts you can find yourself with negative equity. Here I’ll review the pros and cons of the Zero Down mortgage.
Benefits
-If you have a good income but have not saved any money it allows you to purchase a property without waiting. This is very appealing in a rising market, especially for recent graduates.
-You can keep your savings for new furniture, rennovations or other moving costs.
Downside
-You will pay significant insurance premiums (this covers the bank in the event you can’t make your payments) for the privilege of having a Zero Down mortgage.
-If your property doesn’t increase in value over the term of your mortgage you may have trouble refinancing when your mortgage comes due.
-These products are marketed hard because there is money to be made lending money, the more lent the more made. This is part of a scary societal trend of over borrowing. Before taking on any debt you must really consider your ability to make payments and what other areas of your lifestyle may suffer if you stretch your income too much.
Even in some advertising they show the client as broke! When used responsibly the no money down mortgage is a great tool, unfortunately irresponsible lenders tend to market it towards those who should not be using the product.
In conclusion the Zero Down mortgage is an excellent option to have available when used properly. Under the right circumstances this mortgage allows you to buy property immediately without waiting years to save a down payment. In a fast rising market this could be a major benefit. Imagine having waited 2 years from 2004 to 2006 to save a down payment to avoid insurance premiums only to have the property you want increase in value 40%?
If you’re considering this option send me an email and we can discuss your circumstances and decide what is your best solution.