Down Payment or “no money down” to buy a home

Many books and advertisements promote the idea of buying a home with “no money down.” However, this approach is generally impractical for most buyers. Zero down payment options are often suited for high-risk investors with significant time flexibility who prioritize profit over location.

For those looking to purchase a home in a desirable area, a substantial down payment is typically required.

Financing a Home Purchase

Most home purchases involve two main components:

1. Cash for Down Payment and Closing Costs:
   • The down payment requires a significant amount, with additional cash needed for closing costs.
2. Mortgage Loan:
   • Covers the difference between the purchase price and the down payment.

Mortgage and Down Payment Calculator

Use the calculator below to get an estimate of the mortgage loan amount and closing costs based on the home’s purchase price and your available down payment.

The Importance of a 20% Down Payment

Mortgage lenders favor buyers who can put down 20% of the home’s purchase price. Benefits include:

• Lower Interest Rates and Fees: 20% down payment often qualifies buyers for the best rates.
• Avoiding Mortgage Insurance: This insurance protects lenders if the homeowner defaults but adds a monthly cost.

Without 20% down, expect:

• Higher Rates and Fees: With less than 10% down, lenders typically impose higher interest rates.
• Higher Monthly Payments: Lower down payments lead to increased monthly obligations, potentially straining your budget.

How to Save for a 20% Down Payment

For a $200,000 home, a 20% down payment amounts to $40,000. Here are some strategies:

• Sell an Existing Property: Recover equity from your current home.
• Save Aggressively: Set aside a large portion of your salary in a money market fund.
• Borrow from Family: Consider borrowing from parents or grandparents.
• Partner Up: Share costs with a spouse or friend.

Remember, the “dream home” is often acquired after several moves. Start with a smaller home, build equity, and plan for a larger property down the line.

Caution: Risky Mortgage Products

Many brokers and lenders may encourage buyers to purchase homes at the edge of affordability. Be wary of:

• Adjustable-Rate Mortgages (ARMs): These start with low payments but can increase significantly over time.
• Interest-Only Loans: Payments only cover interest, building no equity. At the end of the term, the full amount is still owed.

Advice: Avoid buying at your financial limit. Even if a lender offers a $160,000 mortgage, consider borrowing around 80% of that ($130,000) to avoid overextending.

Understanding Equity

Home Equity is the property value minus any unpaid loans or liens.

Example:

• Home Value: $100,000
• Mortgage Balance: $60,000
• Equity: $40,000 ($100,000 – $60,000)

Additional debts, like contractor fees, can reduce equity further if they are attached as liens.

Building equity involves paying down the mortgage. If a home has no mortgage, the owner’s equity equals the full sale price.