mortgage

Listen to Dad; put nothing down on home?

Steve McLindenDear Real Estate Adviser,
My husband and I are in the market to buy a home. We have the ability to put 20 percent down to keep monthly payments low for a 30-year loan. However, my father advises we should get a zero percent down loan instead and use our down payment money to make higher mortgage payments. He believes this builds greater equity in the long term. Which strategy is better?
-- Sharmila

Dear Sharmila,
No offense to your obviously well-meaning pop, but his suggestion for a zero percent down payment may not be the best solution for you "kids" these days, nor even feasible in today's market.

Times have changed in the lending world in the past half-decade or so, and zero-down conventional loans -- if you can find them -- carry stricter terms than they did in, say, 2006. That's in part because the high default volume of those no-money-down loans was one of the chief causes of the catastrophic mortgage-lending crisis. Hence, banks require much higher credit scores than they did in the past for the scant few zero-down loans and even 5 percent down conventional loans they're offering. The less money you put down, the less a bank is willing to lend you, which limits your options when you're shopping for a house and for a lender. In markets that are still suffering price declines, "zeros" are virtually impossible to find.

Then there's the matter of private mortgage insurance, or PMI. When you're putting down very little on a conventional mortgage (anything less than 20 percent, typically), you have to pay PMI. The less you plunk down, the more PMI you pay and the longer you will be forced to pay it.

Now, there is an 80/20 loan option where you get one loan for 80 percent of a home's price and a second for the 20 percent balance. With an 80/20, you usually don't pay PMI, but the rub is you'll pay a higher interest rate on that 20 percent loan. Plus, those loans aren't always readily available today, either. There's always the FHA home loan, which is insured by the Federal Housing Administration, and applied for through an FHA-approved mortgage lender. There, you'd have to meet sets of borrowing guidelines for both entities. Both you and your husband will have to pass a thorough examination of your finances, debt and employment situations to qualify, plus you'd still pay mortgage insurance. The tradeoff is a low FHA mortgage interest rate.

Because every situation is a little different, I'd encourage you to run the numbers on the various deals you are offered. Calculate the total monthly payments of each, including PMI, over the lives of the loans. Then see what works best for your needs.

Ultimately though, your equity buildup and total loan payout will be better served with more skin in the game -- a higher down payment. If you can manage to put 20 percent down, you'll have far more options and lower payments.

Good luck!

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