100% Financing
Zero Down…How Can We Do That?
It seems that within the mortgage industry, there’s always a great new product just around the corner that benefits the consumer. The latest of these to surface is the “zero down” mortgage. This mortgage seems to suit two decidedly different types of borrowers:
Let’s take a look at them individually:
- If you have great credit, loans have come into existence since January of 2000 that allow you to get a mortgage without having to come up with a down payment. This means that you can borrow 100% of the purchase price of the home, provided that you, the borrower, are contributing a minimum of $500.00 towards the closing costs and escrows. Interest rates on a “zero down” mortgage will run slightly higher than those available to conforming borrowers (those with at least 5% to use for a down payment). The interest rate difference is usually in the neighborhood of .375% higher depending on the amount of the mortgage. (Example, if the going rate was 6.5%, the rate with no down payment would be 6.875%)
- For those with less than average credit, loans are available and are usually viewed as a temporary solution to a short term problem. They can be structured as one loan or as a 1st mortgage (80% of the loan amount) and a 2nd mortgage, (for the remaining 20%) to avoid having to pay mortgage insurance. The loans generally offer fixed rates for 2 -3 years at which time you would be able to refinance. The interest rates are higher than other loans, due to the high risk nature, but are usually determined based on the borrower’s credit scores. In general, scores of 580 or higher are required.
With a Zero Down Payment Loan, you can buy a house NOW, reap the benefits of an interest deduction each year at tax time, and begin to accrue equity in the home of your dreams and if applicable begin the process of restoring your credit.
First Time Homebuyer Loans
There are special first time homebuyer programs that allow for low down payment loans with reduced or no mortgage insurance. The challenge is that there oftentimes are income limitations (income cannot exceed 80% of the HUD median income level or $69,000 in metro Atlanta). That generally means that homes above $250,000 are off limits.
Some municipalities offer special financing or grants for low income residents or to stimulate homeownership in areas of town that they wish to stimulate. These are rare but they do exist.
FHA/VA Loans
FHA and VA loans are backed by the federal government. FHA loans are insured by the Federal government and are available up to 100% of the purchase price of a new home. There is a fee for doing these loans called an upfront Mortgage Insurance Premium (MIP) equal to 1.5% of the purchase price of the home and in addition, you pay a monthly MIP premium to insure the mortgage against default. These loans make sense for a small percentage of people who are credit challenged but you should exhaust all of your other possibilities to avoid paying the 1.5% fee first.
VA loans are guaranteed against default by the federal government and are available up to 100% of the purchase price for eligible veterans.
Interest Only Loans
With an Interest-Only loan, home buyers are able to choose their monthly payment and can do one of a few things: They can qualify for a more home, keep more of their cash in reserve or to save for retirement, pay down high-interest debt, or make home improvements.
Interest-Only loans offer you:
- Possibility for lower monthly payments: for the first 10 years of the mortgage you can choose to pay interest only – plus any portion of the principal that you would like to pay.
- The chance to be able to afford the home of your dreams – you can buy up to 25% more home with interest-only payments.
- The benefits of an interest tax deduction
- A plethora of money-management opportunities…you can save for
- Investments, such as tax deferred and high-yield savings, or maximizing contributions to your retirement fund
- Pay non-tax-deductible or high interest debts in full
- Tuition costs, medical expenses, vacations, or home improvement.
Here’s how it works:
- This innovative approach to home financing can help you reap the double benefits of more affordable monthly payments PLUS improved cash flow. You choose your own payment amount each month. You may make the minimum payment, which would be interest only…or you can choose to pay towards your principal balance any time you wish – it’s completely up to you! In any case, the principal balance on your mortgage will never increase.
Types of Loans Offered:
- Interest Only loans are offered as fixed term adjustable rates or fixed rates. The adjustable rates are offered as a fixed rate for a specific period of time. For example you can pick the length of protection you are comfortable with, 6 months, 1,3,5,7 or 10 years. The rate would be fixed for the initial period and then adjust annually based on market rates after that. The longer the period of time you need protection for the higher the rate. The loans would offer the interest only feature for the initial fixed rate period you select.
Recently, lender started offering a 30 year fixed rate with an interest only payment option for the first 10 or 15 years. The rates are slightly higher than a traditional 30 year fixed and they will amortize over the remaining period once the interest only period expires. For example, if you have a 30 year fixed with a 10 year interest only feature, after ten years, you would still owe the entire balance on the loan and would be required to pay it back over the remaining 20 years. Your payment would jump fairly dramatically in this example…so be prepared
It should be noted that if you are borrowing over 95% of the value of the home, it really is not a wise choice to select this product. You are always better off being on a regular regimen of paying down principal with each payment until such time as you have built up enough equity so you have a comfortable cushion should you suddenly have to sell your home.
Fixed Rate Loans
These loans are fixed for either a 10, 15, 20, 30 or now even 40 year period. They are amortized over the period of time you select, so the shorter the period the larger the monthly payment will be. Also, the shorter the time period you select the more significant the interest savings will be over the term of the loan. But one note of caution is that you should make sure that you are comfortable with whatever period you select, i.e. if you select a 15 year fixed you can’t go back to a 30 year later if let’s say you loose your job. Generally there is a slightly better interest rate offered for the shorter term loans.
Adjustable Rate Loans
Adjustable Rate Mortgages, or ARM’s, differ from fixed rate mortgages in that the interest rate and monthly payment move up (or down) as market interest rates change.
Most Adjustable Rate Mortgages have an initial period where the interest rate is fixed, followed by a much longer period during which the rate changes at preset intervals. The rates charged during the initial periods are generally lower than the rates found on comparable fixed rate mortgages. The initial fixed rate period can be as short as a month or as long as 10 years. Five-year ARM’s are the most common, though the so-called hybrid Adjustable Rate Mortgage has become popular in recent years.
These hybrid Adjustable Rate Mortgages -- sometimes referred to as 3/1, 5/1, 7/1 or 10/1 loans -- have fixed rates for the first three, five, seven or 10 years, followed by rates that adjust annually thereafter. After the fixed rate honeymoon, an adjustable rate mortgage fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure, then recalculates what the borrower's new rate and payment will be. The process repeats each time an adjustment date rolls around.
