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Buying a house with 0 money down? :confused:

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<< How about when they have no short term debt and plenty of money to meet the monthly payments? >>


Sounds like me. 😀

Put 20% down...more may not be necessary since mortgage rates are near historic lows and the interest is deductible. Use any extra monies to fund a Roth IRA, since you can always withdrawl the contributions at any time tax-free.


As long as you have good credit, somebody somehow will let you buy a home for almost no money down. There are consequences of course with some of these programs but if you want to buy and you don't have the liquid assets, a no-money-down arrangement may be a valid choice. Just understand that the less you put down, the more you are leveraged. Example:

(2002) Buy a house for 100K, put 5K down = 95K mortgage
(2005) Sell the house for 115K

In 2005, your mortgage balance will be around 93K. So your equity went from 5K (100-95) to 22K (115-93) in three years. That's a 64% annual gain!

(2002) Buy a house for 100K, put 20K down = 80K mortgage
(2005) Sell the house for 115K

In 2005, your mortgage balance will be around 78K. So your equity went from 20K (100-80) to 37K (115-78) in three years. That's a 23% annual gain, which is much smaller than the other example.

So the less you put down, the greater the rate of return you can earn. However, it works the other way too:

(2002) Buy a house for 100K, put 5K down = 95K mortgage
(2005) Sell the house for 90K

Equity goes from 5K to -3K (90-93). You will owe more than the house is even worth. Not good.

(2002) Buy a house for 100K, put 20K down = 80K mortgage
(2005) Sell the house for 90K

Equity goes from 20K to 12K (90-78). You still have some equity.

Leverage can be a great thing: make big profits from small initial "contributions", but it can also spell financial disaster.
 
There are a couple of ways to do this. One, you can find a mortgage company that will do a 100% (or 103%, whatever) loan - they are loaning you the full value of the mortgage. Unfortunately this looks bad to creditors because you are essentially stating that you aren't responsible enough to save money. The drawback to this is that you will pay a higher interest rate. Say the average rate is 6.5% on a 30-year note with 5% down. On a zero-down note then you're probably looking at 7, 7.25% interest. That may not seem like much but take a look at a mortgage calculator and it can add up. Using this example, on a $100,000 home you'll pay $21,167 in interest on 6.5% ($95,000 financed after $5000 down), and $45,583 for a 7.25% loan. $24,000 in extra interest in order to avoid paying the first $5000 of the loan up front. Ouchie. This is especially marketed to first time homebuyers because you're more likely to allow yourself to be taken advantage of by the mortgage company.

The second (and more popular) method would be to add a 'decorating allowance' on to the house. Basically, you would offer $110,000 on a $100,000 house with the understanding that the seller would slide you a check for the $10,000 difference at the title company at the close of the house. Using our same example, you would finance $110,000 (minus 5% down), for an actual mortgage of $104,500. The interest you pay would be $33,283. The seller gives you $10,000 ($5500 of this is your down payment), $4,500 that you can use towards closing costs, actual decorating, etc. You still end up paying a little more in interest but end up with cash in hand at the end of the deal and a lower interest rate than a flat 0-down loan.

This ignores things like PMI (property mortgage insurance) which is required until you have at least 20% equity in the home (in the US), homeowner's insurance, taxes, etc. and doesn't take into account the actual APR after all of these fees are added in but you can get the idea.
 
I believe Canadian mortgages are very different from US ones. For one thing I do not believe there is a fixed rate 30 year or 15 year mortgage there. Instead the rates change based on the period of lock in from 6 months to 10 years. No doubt they have programs there for first time home buyers but due to different tax laws etc they probably are significantly different than US programs.
 


<< with a good appraissal you could possibly get rid of your PMI payments within the year if your appraisal went up enough even with 0% down >>


Just wanted to point out that the laws have changed on PMI here in the U.S. On any mortgage tendered after June, 1999, you can only get rid of PMI if you have 20% equity of the original appraised value of the home, so getting a beneficial appraisal no longer works. The Fed passed this law because banks were free to make their own rules for getting rid of PMI, and they wanted to get one way set in stone. I'm not 100% sure this covers all mortgages, but I am pretty sure it covers any FHA backed loans. If you got your mortgage after June 1999, then you have to either get the 20% equity in the original value, or refinance if the appraised value of your house has increased significantly.
 
Ok a couple of you are tossing around costs with little comparison to TCO (Total cost of ownership). Everyone needs to run the numbers themselves but the scenarios you all are presenting are 1/4 of the total picture. When you purchase a home you need to consider the TCO vs. the opportunity loss of invested monies. For example..

Lets deal with the scenario of a $100,000 mortgage, 0% down, 7.5% interest, 30 year term, with $2100 in loan closing costs. We will also use an assumed PMI of $35 (this PMI is very low for my area, most PMI for $100k runs $50+) and an annual property tax of $800 and home owners insurance of $1500 a year. Finanally we will assume the standard 6% realtors fee in the event of sale.

Calculated basline payment using standard amortrization is: $665.30
Splitting the insurance and property tax into 12 equal payments: $191.67
PMI: $35

= A compiled payment of: $891.97

Assuming you remain in a house for 5 years from the date of purchase you need to split the realtors fees and loan origination fees into a per montly cost.

[$2100+(.06)(100,000)]/60 = $135.00

Over the 5 year life of this loan you will pay cumulative interest of: $34,049.74. Or $567.50 a month in interest on average. (I recognize that averaging interest isn't the best, if you understand this point run the model yourself on a per year basis 😉 )

The equity in the home at the end of 5 years is: $5,752.88 assuming no appreciation. Assuming a 4% increase in home value over 5 years yields $9,752.88. (or $162.55 a month over 5 years)

The tax benefit of doing the mortgage is a yearly deduction on the interest. This reduces your gross income and results in a tax savings equal to your tax rate * the deduction. (I know I'm simplifying you @$# accountants). Therefore tax savings = (0.28)(567.50)(12) = $190.68. (or $15.89 a month) If you're lucky it will drop you a bracket and you will see more savings. (This doesn't take into account the benefit that you then ammortorize all deductions)

To sum up you have total costs of: (per month)

Compiled payment: -$891.97+
Opening/closing: -$135.00+

= -$1026.97

Total benefits: (per month)

Equity buildup: $162.55
Tax savings: $15.89

= $178.44

Therefore your total cost of ownership is: $848.53.

Now anyone buying a house should run these numbers with their OWN scenario. Is that TCO cheaper or more expensive than renting when you account for the cost of living in your area in regards to both rental costs and home costs. I guarantee you one thing, you jump into and out of a house in under 5 years and you got a good chance of losing money vs. renting. If you jump in and out in a period under 3 years you have a good chance of losing big $$$.
 
On the TCO calculations, you are underestimating the tax benefits a little. You also get to deduct taxes as well. I know for me, with a house my itemized deductions are more than twice the standard deduction. Things like charitable payments, state income taxes, local income taxes, are all items you don't normally get to deduct when taking the standard deduction, but they all come into play with itemized deductions. Instead of having 0 exemptions and still owing, I have 4 exemptions and get $2000 back. My tax savings work out to a heck of a lot more than $15 per month.

Otherwise, the numbers look right. Most of the numbers you use fit my model (I payer higher taxes, lower insurance, which helps out since the taxes are deductible, the insurance is not). Another item you do not list in TCO is the cost of maintenance, which if you are buying a house as an investment you need to include in the model as well. Of course, I don't buy houses for the investment, I buy them for the pride of home ownership, which no TCO can overcome.
 
Another recommendation:
Put down 10% and take out an immediate home equity loan. Use the loan to pay down the original mortgage to 20% equity. Voila no PMI! The catch is that you have two loans to pay, but you are saving on PMI and it can make a lot of sense.
 


<< ...and an annual property tax of $800... >>



What a nice dream. I'm looking at property taxes of $3700/year.
 


<< What a nice dream. I'm looking at property taxes of $3700/year. >>



Oh you poor little baby. *cry* I feel so sad for you. Guess what, you probably live in a state that doesn't have an income tax so the people with property pay all the taxes. My state has income, property and sales tax.


 


<<

<< What a nice dream. I'm looking at property taxes of $3700/year. >>



Oh you poor little baby. *cry* I feel so sad for you. Guess what, you probably live in a state that doesn't have an income tax so the people with property pay all the taxes. My state has income, property and sales tax. >>



Ha! Move out of a desolate state and see what you'll pay. My parents have a modest, 2400 sq/ft home on a 1 acre plot of land. Their house is appraised at about $160,000(cheap for the area) and their property taxes are going to be close to $4,300 this year. They live in a rural area, and on a gravel road.

And Illinois MOST CERTAINLY has income taxes and a sales tax at 7%(8+% in many parts).
 
n8,

i too am looking to buy before the year is over. i plan on putting a 20 K downpayment on a condo in the around $100 K mark. i'd rather have a big downpayment so the mortgage payments are less. i'll be starting my research in the next few weeks or so, so if i find out anything i'll share with you 🙂
 


<< n8,

i too am looking to buy before the year is over. i plan on putting a 20 K downpayment on a condo in the around $100 K mark. i'd rather have a big downpayment so the mortgage payments are less. i'll be starting my research in the next few weeks or so, so if i find out anything i'll share with you 🙂 >>



20K? I take it you are pretty good with saving then! Nice job!

You are in TO right? Some of the best bang for the buck condos are at CityPlace. Check them out, and thanks for the help.
 


<<

<< What a nice dream. I'm looking at property taxes of $3700/year. >>



Oh you poor little baby. *cry* I feel so sad for you. Guess what, you probably live in a state that doesn't have an income tax so the people with property pay all the taxes. My state has income, property and sales tax. >>





My old man was paying over 20K/year in property taxes in illinois. He moved to Texas where he pays similar taxes but w/no income tax.
 
I'd also like to add that my property taxes are just short of $2000 for a 1600 sq/ft townhouse on a plot just a bit bigger than the house. House value is $123k.
 


<<

<< n8,

i too am looking to buy before the year is over. i plan on putting a 20 K downpayment on a condo in the around $100 K mark. i'd rather have a big downpayment so the mortgage payments are less. i'll be starting my research in the next few weeks or so, so if i find out anything i'll share with you 🙂 >>



20K? I take it you are pretty good with saving then! Nice job!

You are in TO right? Some of the best bang for the buck condos are at CityPlace. Check them out, and thanks for the help. >>



yeah i am! thanks for the link, i'll check it out tomorrow (it's my bedtime now, *SIGH*!!!!!) and yeah, budgeting is my friend 😛
 


<<

<< What a nice dream. I'm looking at property taxes of $3700/year. >>



Oh you poor little baby. *cry* I feel so sad for you. Guess what, you probably live in a state that doesn't have an income tax so the people with property pay all the taxes. My state has income, property and sales tax. >>


I pay $2300/yr property taxes on a property appraised at $132,000. State/local income taxes are a flat 3.8% combined, sales tax is 6% ("essential" items are exempted). The old people here all complain about the property taxes and want the state to slash them and raise the wage tax, but that's just too bad; seniors have an obligation to share the costs of public education just like the rest of us.
 


<< Ok a couple of you are tossing around costs with little comparison to TCO (Total cost of ownership). Everyone needs to run the numbers themselves but the scenarios you all are presenting are 1/4 of the total picture. When you purchase a home you need to consider the TCO vs. the opportunity loss of invested monies. For example..

Lets deal with the scenario of a $100,000 mortgage, 0% down, 7.5% interest, 30 year term, with $2100 in loan closing costs. We will also use an assumed PMI of $35 (this PMI is very low for my area, most PMI for $100k runs $50+) and an annual property tax of $800 and home owners insurance of $1500 a year. Finanally we will assume the standard 6% realtors fee in the event of sale.

Calculated basline payment using standard amortrization is: $665.30
Splitting the insurance and property tax into 12 equal payments: $191.67
PMI: $35

= A compiled payment of: $891.97

Assuming you remain in a house for 5 years from the date of purchase you need to split the realtors fees and loan origination fees into a per montly cost.

[$2100+(.06)(100,000)]/60 = $135.00

Over the 5 year life of this loan you will pay cumulative interest of: $34,049.74. Or $567.50 a month in interest on average. (I recognize that averaging interest isn't the best, if you understand this point run the model yourself on a per year basis 😉 )

The equity in the home at the end of 5 years is: $5,752.88 assuming no appreciation. Assuming a 4% increase in home value over 5 years yields $9,752.88. (or $162.55 a month over 5 years)

The tax benefit of doing the mortgage is a yearly deduction on the interest. This reduces your gross income and results in a tax savings equal to your tax rate * the deduction. (I know I'm simplifying you @$# accountants). Therefore tax savings = (0.28)(567.50)(12) = $190.68. (or $15.89 a month) If you're lucky it will drop you a bracket and you will see more savings. (This doesn't take into account the benefit that you then ammortorize all deductions)

To sum up you have total costs of: (per month)

Compiled payment: -$891.97+
Opening/closing: -$135.00+

= -$1026.97

Total benefits: (per month)

Equity buildup: $162.55
Tax savings: $15.89

= $178.44

Therefore your total cost of ownership is: $848.53.

Now anyone buying a house should run these numbers with their OWN scenario. Is that TCO cheaper or more expensive than renting when you account for the cost of living in your area in regards to both rental costs and home costs. I guarantee you one thing, you jump into and out of a house in under 5 years and you got a good chance of losing money vs. renting. If you jump in and out in a period under 3 years you have a good chance of losing big $$$. >>

This is a nice example but you shouldn't discount the idea of appreciation on the home. Yes, if you ignore appreciation then you may very well be better off renting. But I gained 20% on the last home I sold after being there only one year, and it was an older home. Just like any other investment it's a matter of being in the right place at the right time. But I would discourage anyone who rents for 5 years just because they thought it would be a wash to buy a house. Sure, with buying you take a chance and might not make 20% but only 5 or 10%. But if you rent I guarantee that you end up with 0% return.
 
Yeh, my appreciation in the last 10 months has almost eliminated any costs that I'll incur by paying PMI.

Not counting PMI, and property taxes, my mortgage payment is actually cheaper than what my rent payment would be. For *technically* less money I get a brand new house, with brand new appliances, double the living space, a two stall attached garage, an actual yard and patio to relax on and a place that is MINE. Sure, once I figure in PMI and property taxes, I'm paying about $250 more a month, but with as much extra I'm getting, the $250 a month more is a minor inconvenience.

Also, in rahvin's original figure, he included realators fees. I paid no such fees. I paid no loan origination fee. My total closing costs were $1200. I also what to know who the hell pays $1500 a year of homeowners insurance on a $100,000 house????

 
The TCO calculation above missed out on the other BIG reason home ownership is good - tax deduction.

The interest you pay on your mortgage is tax deductible. In the above example that $660 monthly payment would be be almost ALL interest for the first 5 years of the mortgage. That is a $7900 tax deduction, which is over $2000 less tax to pay each year.
 
Here's what I did. Not the same as buying but it should work similar.

I owned 40 acres of land. I did not owe any money on this land at all.
My wife and I drew a house plan that we liked and I made plans on AutoCAD.
I walked two cubicles down and had my boss a P.E. approve the plans.
I went to the bank and told them I was going to build this house on this property.
They sent an appraisor to my land with a copy of the house plans.
He valued the house on the land at $235,000.
The bank told me that they would lend me up to 80% of $235,000 = $188,000
I built the house COMPLETELY by myself. I mean I did everything, hired no contractors. I bought or rented the tools I needed.
8 months later I finished driving the last nail.
Total Cost $78,352.12 for a 2200 square foot house.
The appraisor came out again and this time appraised the house for $275,000.
I paid $0 out of my pocket during this whole ordeal.
Since I was able to build the house for under the amount they agreed to loan me, I had no down payment.
They threw the closing cost in on the end of the loan.
All I had to do was move in and start making payments.

Oh and BTW, if you don't REALLY LOVE carpenter work, be smarter than me and hire somebody to build your house.
🙂
 
In addition to the tax breaks that come with home ownership, there is also the fact that being a home owner rather than a renter makes you look more stable and reliable to future creditors or prospective employers. Being married does, too.
 
Stop skim reading people. And stop saying "oh this is out of line with my area". (I noted half the stuff you all are complaining about)

As I noted in the bottom of my post, IF YOU ARE CONSIDERING HOME OWNERSHIP YOU SHOULD RUN A TCO COMPARISON FOR YOUR PERSONAL SITUATION.

There is NO pat answer that says always buy or never buy. You have to run the individual numbers for yourself AND you should compare it against the interest income you would lose on saving the same amount. Then you have a real hard number for your situation that only applies to you and YOU can decide if buying is worth it.

My post was simply pointing out that those offering pat answers on yes buy or don't buy aren't doing a REAL analysis of what the home would cost you.
 
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