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With today’s high real estate prices, struggling to come up with a 20 percent down payment to buy a home can be a daunting task. Fortunately, there are options that can help. Many lenders now offer non-traditional no-down-payment mortgages or second mortgages to cover the cost of a down payment.
No-down-payment mortgage
With a no-down-payment mortgage, 100 percent of the purchase price of a home is financed with a single mortgage and the homebuyer makes one monthly mortgage payment. The advantage, especially when housing prices are escalating, is that you can enter the housing market without waiting to save up a down payment. The disadvantage of this type of financing is that you are likely to be charged a higher interest rate than you would with a standard mortgage. This means your monthly mortgage payment will be higher. Also, because you didn’t make the standard 20 percent down payment, you will have to pay private mortgage insurance (PMI) to protect the lender in the event that you default on your loan.
Second mortgage
Another option for buying a home without a down payment is a second mortgage, often called a piggyback loan. If you use an 80/20 loan, 80 percent of the purchase price can be financed through a first mortgage and the remaining 20 percent comes from a second mortgage. The advantage of this type of loan is that you don’t have to pay private mortgage insurance. The disadvantage is that the second mortgage usually carries a higher interest rate than the first. You must therefore assess whether you are better off paying for the insurance or the additional carrying costs.
Before choosing a no-down-payment loan, you should consider both your own personal situation and the state of the housing market. When housing prices are escalating, it may make sense to jump into the market as soon as possible. However, the reverse is also true. If you were to choose a no-down-payment mortgage and the price of houses were to drop in value, you could find yourself in the position of owing more for your home than it’s potential resale value. So weigh all of the factors carefully and discuss with your lender if it’s the right option for you.