01 Jun The Pros and Cons of No Down Payment on a Home
You don’t have much money saved for a down payment, but you want a home. These days, you have several options for no-down-payment loans. The United States Department of Agriculture (USDA) and U.S. Department of Veterans Affairs (VA) both offer no-down-payment loans, and the Navy Federal Credit Union has even gotten in on the action. The question is, however, are these loans worth it? Look at the pros and cons to decide if you should go with a no-down-payment home loan.
No PMI – Pros
If you pay less than 20 percent down when you finance a home, you have to get private mortgage insurance (PMI). At least that is almost always true. You don’t have to get PMI with USDA or VA loans, even when you don’t put any money down. You can also avoid PMI with some Navy Federal Credit Union loans.
Look at how this compares with low-down-payment loans. You can get a Federal Housing Administration (FHA) loan for as little as 3.5 percent down. That sounds great, but you have to carry PMI the entire time. That is longer than what is typically required. Conventional loans typically only make you carry PMI until the loan-to-value ratio is at 80 percent. In this case, a no-down-payment loan is better than a low-down-payment loan through the FHA.
Hold Onto Your Resources – Pros
Most people can scrounge up a down payment if they absolutely have to, but that might mean dipping into their retirement or saving accounts. If you go with a no-down-payment loan, you can hold onto those resources, meaning they can continue to work for you. You can move into your new home with your retirement and savings accounts intact.
Less Equity in the Home – Cons
Your down payment lets you build a nice amount of equity into the home right off the bat. On the flip side, when you don’t make a down payment, you don’t have equity in the home. Your equity will build up slowly in time, but it won’t provide you with a safety net. For example, if you have to take out a home equity loan to cover repairs or other expenses, you might have some trouble if you don’t make a down payment. In fact, you might not have enough equity to borrow.
Pay Longer – Cons
When people put down a large down payment, they can often pay off the home faster than someone who doesn’t put a down payment down. If you don’t put any money down, you can expect to pay on your mortgage for the full 30 years as compared to 15 years for someone who puts a lot down. The longer you pay on the loan, the more interest you end up paying. That can make your home feel less like an investment and more like the cross you have to bear.
Ending Up Upside Down – Cons
Some people who take zero-down-payment loans end up upside down in their mortgages. The market can take a downturn and, suddenly, they owe more than the home is worth. The market often corrects itself in time, but this can still be very frustrating.
While zero-down-payment loans are certainly a viable option for people who don’t have the money for a down payment, you need to consider the drawbacks, as well. The lack of equity can be a serious problem for homeowners, and the idea of going upside down in the loan is frightening. However, if the lack of PMI and not putting any money down are attractive enough to you, these drawbacks can be overcome.