Is 100% financing a good idea?

[GasX]

Originally posted by: Krazefinn

Originally posted by: Mwilding
Noone seems to have mentioned the big risk of 100% financing. If the value of your home drops and you need to sell, you have to come up with the cash to cover the loss to pay off the mortgage. You could end up forced to stay in that house for a while until you can afford to get out from under...

So the only difference to higher down payment in depreciating market, yoyu have ALREADY paid that money up front? No real difference if its 100% or 80% as far as risk to you. SOme would venture the guess that 0 down IS less risk...
100% is somewhat more risk to lender...thats why the cost is higher. And often for 100% loans, the lender is more conservative with the appraisal figures...and less likely to just "hit the number".

If you make a 20% or more down payment, you pay no PMI and can sell and leave at anytime. This second point is not an issue for many people, but it must be considered. Yes, you can lose money with or without a down payment, but the person with the down payment would not have to cough anything up to sell his house. Considering most people with 100% mortgages don't have a lot of liquid cash, this is an important point.

 

[FelixDeCat]

Originally posted by: FelixDeKat

Originally posted by: SampSon
It all depends on how you work the loan package.
I went 100% financing with FHA, no PMI.

PMI = bad

Get a 120% loan (two loans) and use the second as the down on the first - viola NO PMI! This could save you 100s/mo in PMI insurance savings, albeit at a higher rate. Refi later into one loan using appreciation to cover difference.

/pro advice

That is taking into account that you live in an area that appreciation outpaces interest rates. I've seen way too many people get screwed doing this because they can't afford the loan they are getting to begin with.

You are right, FHA loans DONT have PMI, the have MIP. Call your mortgage company and ask them out how much your MIP premium is. NEVER GO FHA!!!!!! Its a 'last resort' mortgage because it has the highest mortgage insurance premiums.

Theres one caveat to my answer if you have bad credit:

FHA would be cheaper b/c they charge .5 of the loan balance for all loans for mort insurance. On a $120k conv loan your PMI could be as high as $350/mo with very bad credit. On FHA it would be $50/mo as everyone is treated the same. You still have to qualify though.

 

[azilaga]

First of all, congratulations on your decision to purchase. Buying a home is one of the best things that's ever happened to me financially. It doesn't really matter that the values of homes have risen incredibly over the last few years because I plan on keeping what I have. What matters is that I have a place I can call my own, I have tax write-offs (which you'll be thankful for next year), and I know I'll always have a place where I want to live.

Regardless, if you plan on owning your condo for a while, I think you should go for the solution that's lowest on the monthly payments, in this scenario, probably the 2 loan solution w/o the PMI. This will be to your advantage if you decide to rent out your unit later or if you decide to add $100 or so to your prinicipal payments to accelerate paying off your loan.

Good luck.

 

[MixMasterTang]

I did a 100% Financing Loan with Wells Fargo in Sep of 2003. No pre-payment penalities, 5.5% fixed for 30 years. I do pay 125 a month in PMI though which sucks, but other than that I don't/didn't see any other downsides of getting a 100% financed loan.

 

[Vic]

Originally posted by: GagHalfrunt

Originally posted by: z0mb13

Originally posted by: sm8000
zombie - is that bad or good?

Depends on your preferences.

Obviously you will be paying more interest that if you have the downpayment and go the prime route. However an added benefit is you will own your own place, and probably (hopefully) your income will increase in the future, so you can pay down your mortgage faster.

I would talk to a broker regarding your situation, and make sure you can make the monthly payments comfortably. What I mean by comfortable is having a higher standard than what the lender will require (make sure your DTI or debt to income is at a level that you are comfortable with)

Wrong-o. Read the fine print on those BS 0% mortgages. They're all going to have significantly higher interest rates and prepayment penalties. Even of you win the lottery and pay the thing off in 3 years instead of 30 you're going to wind up eating the entire financed amount. If you truly believe that you're going to be able to buy property 0% down the same way you can buy it at 10% down you should pass right over condos and buy the Brooklyn Bridge instead.

You have no idea what you're talking about.

<- mortgage broker

 

[badmouse]

The key question is your income. Do you have enough to pay for the financing on the condo, and still have a bunch left over for savings, etc?

The best way (financially) to buy a condo is to buy one as a landlord - own it, rent it out at a profit. And live (yourself) in a cheap apartment, allowing you to save up money. It's a great way to build up a real estate empire on the side.

Time for you to do some research.

Good luck!

 

[Budmantom]

Vic,

Instead of going with an 80-20 isn't there a program where you pay 1% upfront instead of pmi?

 

[Budmantom]

Originally posted by: badmouse
The key question is your income. Do you have enough to pay for the financing on the condo, and still have a bunch left over for savings, etc?

The best way (financially) to buy a condo is to buy one as a landlord - own it, rent it out at a profit. And live (yourself) in a cheap apartment, allowing you to save up money. It's a great way to build up a real estate empire on the side.

Time for you to do some research.

Good luck!

LOL

 

[Linflas]

Originally posted by: Mwilding
Noone seems to have mentioned the big risk of 100% financing. If the value of your home drops and you need to sell, you have to come up with the cash to cover the loss to pay off the mortgage. You could end up forced to stay in that house for a while until you can afford to get out from under...

Or take a loss. Both my mortgages have been for 100% but they are VA loans so no PMI, screwy rates etc. We bought our townhouse right at the peak of the real estate market in 1989 and when we sold it in 1996 we took an 8K loss. The house we live in now has almost tripled in value so this time we are on the right side of things. 🙂

 

[pulsedrive]

OK, I don't know WHY everyone keeps talking about the 80/20 first and second mortgages, you can and I do have a 100% first mortgage. We have only ONE mortgage and it was for 100% of the appraised price of the property. It was a 6% APR and this was in the DC area. If you live in a major metro area, 100% loans are not a bad choice, because in 5 years your property will definately be a higher value, hell I think we have gain about 20 - 30k on the value of ours in the 9 months we have been there. It's INSANE.

 

[Linflas]

Originally posted by: MixMasterTang
I did a 100% Financing Loan with Wells Fargo in Sep of 2003. No pre-payment penalities, 5.5% fixed for 30 years. I do pay 125 a month in PMI though which sucks, but other than that I don't/didn't see any other downsides of getting a 100% financed loan.

Once you get to where the house has appreciated to where you have over 20% equity isn't there a way to drop the PMI?

 

[MixMasterTang]

Originally posted by: Linflas

Originally posted by: MixMasterTang
I did a 100% Financing Loan with Wells Fargo in Sep of 2003. No pre-payment penalities, 5.5% fixed for 30 years. I do pay 125 a month in PMI though which sucks, but other than that I don't/didn't see any other downsides of getting a 100% financed loan.

Once you get to where the house has appreciated to where you have over 20% equity isn't there a way to drop the PMI?

Yeah you have to have it re-appraised and have had no late payments in the last 12 months.

 

[Garet Jax]

Originally posted by: sm8000
zombie - is that bad or good?

It is potentially bad and potentially good.

Good
1) Allows you to get into a place you own earning tax deductions on your mortgage.
2) Stops you from throwing money fown the drain on rent.

Bad
1) Immediately puts you unside down on your mortgage. Since it costs money to sell your house (closing costs, realtor fees, etc...) - if things change quickly in your life and you need to move you will end up losing money
2) Even worse - if the market corrects and adjusts downwards then you may find yourself in a real pickle. This is one of the unspoken benefits of a down payment. It helps to insulate you in case you need to make a quick sale.

There are lots of other benefits and drawbacks, but these are off the top of my head.

 

[Steve]

Wow, this thread has been booming since I stepped away from my desk this morning. Thanks everyone for your input, and please feel free to contribute more. I'll be chatting with my parents this evening to see what they say, as they're a bit more in the know about this sort of thing (and the area) than I. Still, I always appreciate advice from outsider's experience (and realty workers).

 

[QED]

Originally posted by: MixMasterTang

Originally posted by: Linflas

Originally posted by: MixMasterTang
I did a 100% Financing Loan with Wells Fargo in Sep of 2003. No pre-payment penalities, 5.5% fixed for 30 years. I do pay 125 a month in PMI though which sucks, but other than that I don't/didn't see any other downsides of getting a 100% financed loan.

Once you get to where the house has appreciated to where you have over 20% equity isn't there a way to drop the PMI?

Yeah you have to have it re-appraised and have had no late payments in the last 12 months.

Not necessarily true. It is all dependent on your lender.

Legally, they only have to remove PMI when your outstanding balance is 80% of the original purchase price (or appraised value AT THE TIME of the purchase).

Some lenders will remove it based upon appreciation, but some won't.

 

[Whoozyerdaddy]

I would say this...

1. Generally speaking 100% loans are going to come at an APR premium thus making your payments higher. I would try something else.

2. You should only take this rout is you are committed to hanging on to the condo for at least 5 years.

3. Be prepared to hang on to it longer than that if your local market takes a dip. It could take a while for values to return.

3b. If your market is still going up be prepared to sell it in a couple of years and move the gains into a house. You get more for your money in a house than you do for a condo and you don't have to pay association dues.

 

[MixMasterTang]

Originally posted by: MathMan

Originally posted by: MixMasterTang

Originally posted by: Linflas

Originally posted by: MixMasterTang
I did a 100% Financing Loan with Wells Fargo in Sep of 2003. No pre-payment penalities, 5.5% fixed for 30 years. I do pay 125 a month in PMI though which sucks, but other than that I don't/didn't see any other downsides of getting a 100% financed loan.

Once you get to where the house has appreciated to where you have over 20% equity isn't there a way to drop the PMI?

Yeah you have to have it re-appraised and have had no late payments in the last 12 months.

Not necessarily true. It is all dependent on your lender.

Legally, they only have to remove PMI when your outstanding balance is 80% of the original purchase price (or appraised value AT THE TIME of the purchase).

Some lenders will remove it based upon appreciation, but some won't.

I was referring to my specific loan than Linflas asked me about.

 

[kranky]

Originally posted by: pulsedrive
If you live in a major metro area, 100% loans are not a bad choice, because in 5 years your property will definately be a higher value, hell I think we have gain about 20 - 30k on the value of ours in the 9 months we have been there. It's INSANE.

There are a lot of homeowners facing bankruptcy in California who believed the same thing. There are no guarantees. I just saw an ad the other day in a Sacramento paper where a new home builder cut the prices in four new developments from the $400K range to $300K - about 25%. How would you like to be the guy up the street who just bought his home a month ago for $400K? He just lost $100,000. And if he had 100% financing, he can't even move without coming up with the $100K to pay off the mortgage.

I would think long and hard before taking a 100% mortgage, especially if prices in your area have risen greatly in the last few years. Many people who bought in the last few years have variable rate mortgages and cannot afford to pay higher payments because interest rates are rising. If that happens to be the case in your condo, these people may need to dump their units at any price just to stop the bleeding. If your unit went down 20% in value because of all the owners bailing out and having to sell, would that kill you?

 

[azilaga]

Check out this article I just came across at Motley Fool. In particular, the David Bach paragraph. In short, as long as you own a home, it doesn't matter how you've acquired it as long as it's yours.


http://www.fool.com/News/mft/2006/mft06030223.htm?source=ihghlpban100102

 

[Linflas]

Originally posted by: MathMan

Originally posted by: MixMasterTang

Originally posted by: Linflas

Originally posted by: MixMasterTang
I did a 100% Financing Loan with Wells Fargo in Sep of 2003. No pre-payment penalities, 5.5% fixed for 30 years. I do pay 125 a month in PMI though which sucks, but other than that I don't/didn't see any other downsides of getting a 100% financed loan.

Once you get to where the house has appreciated to where you have over 20% equity isn't there a way to drop the PMI?

Yeah you have to have it re-appraised and have had no late payments in the last 12 months.

Not necessarily true. It is all dependent on your lender.

Legally, they only have to remove PMI when your outstanding balance is 80% of the original purchase price (or appraised value AT THE TIME of the purchase).

Some lenders will remove it based upon appreciation, but some won't.

If they wouldn't then I would be looking to refinance once rates were equal or less than my current rate.

 

[Reel]

Originally posted by: MathMan
No money down mortgages are typically split into two loans:

one standard 30 year loan for 80% of the purchase price, and one 100% HELOC.

Let's assume the purchas price of the condo is $100,000. Let's further assume you can get a decent rate on both mortgages (i.e. other than the fact you have no savings for a down payment, your credit is somewhat good).

For a 30-year mortgage, that would be about 6%. For your HELOC, that would be about 8.5%. The payment on your first mortgage would be $480 + taxes + association fees. The payment on your HELOC would be $142. Hence, your total monthly housing-related expenditures would be about $622 + taxes + association fees.

Compare this to what you might pay for rent, keeping in mind that the interest and property taxes you pay on the condo are tax deductible.

A further wrinkle in this is how much you expect the condo to appreciate in value in the time you are there. You will need it to appreciate a minimum of 5 to 10% to just break even on the whole deal. If you don't plan on being there long enough to see that kind of appreciation, you are probably better of renting...

Just some things to consider...

My numbers work out to be what you gave out more or less. I have a higher purchase price but it is roughly the same ratio. You have my endorsement.

 

[BurnItDwn]

I can't say whether or not it's a good idea, but I can say that I went 0 down on my townhouse 2 years ago, and I do not regret it. My interest rate is 4.25% and I am paying PMI of about 1%. It is an ARM loan, so it will be going up in a few months, but I'm not overly concerned about a 1% increase.

I got my loan throug the credit union at work, however, there were plenty of lenders out there willing to give me a 0 down loan out there. Many suggested an 80% mortgage, and a 20% secondary mortgage at a higher rate (pay the same amount as if there was PMI, but better tax benefits.)

 

[SampSon]

You are right, FHA loans DONT have PMI, the have MIP. Call your mortgage company and ask them out how much your MIP premium is. NEVER GO FHA!!!!!! Its a 'last resort' mortgage because it has the highest mortgage insurance premiums.

To say "never go FHA" is ridiculous. The reality is that most first home buyers can't come up with 20% downpayment, even in low priced areas like where I live.
The 120% loan is popular in areas that people simply cannot get FHA financing because of the high housing costs. In most cases if you cannot afford a std conv mortgage than an FHA mortgage will be a better deal than many of the other special loan packages that are out there. It all depends on your area values and your personal finances. But to say "never go FHA" either means you don't know much about the game, are a mortgage lender who hates when people go FHA because you lose money, or because you're in the game but arn't good at it.
No offence of course. 🙂

Theres one caveat to my answer if you have bad credit:

FHA would be cheaper b/c they charge .5 of the loan balance for all loans for mort insurance. On a $120k conv loan your PMI could be as high as $350/mo with very bad credit. On FHA it would be $50/mo as everyone is treated the same. You still have to qualify though.

MIP is rolled into the mortgage, the upfront standard 1.5% FHA requires can be paid by any number of sources, the most popular method is sellers concessions.

I went over a million loan packages and the best deal was an FHA loan. Sellers concessions paid for the 1.5% upfront, and .25% MIP for the first 5 years of the mortgage until the LTV ratio drops to 22% is a good deal. All said and done an FHA loan saved me 1.5% over the course of my mortgage on this house. There was no loan package available from my clients that offered a better deal. The value is already over the 78% LTV and if I really want to I can refinance before the 5 years is up, but I find no need to unless someone can beat the rate I'm getting.

I do not trust banks and variable rate loans, that is how they sucker you in and then take your money.

 

[FelixDeCat]

Originally posted by: SampSon

You are right, FHA loans DONT have PMI, the have MIP. Call your mortgage company and ask them out how much your MIP premium is. NEVER GO FHA!!!!!! Its a 'last resort' mortgage because it has the highest mortgage insurance premiums.

To say "never go FHA" is ridiculous. The reality is that most first home buyers can't come up with 20% downpayment, even in low priced areas like where I live.
The 120% loan is popular in areas that people simply cannot get FHA financing because of the high housing costs. In most cases if you cannot afford a std conv mortgage than an FHA mortgage will be a better deal than many of the other special loan packages that are out there. It all depends on your area values and your personal finances. But to say "never go FHA" either means you don't know much about the game, are a mortgage lender who hates when people go FHA because you lose money, or because you're in the game but arn't good at it.
No offence of course. 🙂

Theres one caveat to my answer if you have bad credit:

FHA would be cheaper b/c they charge .5 of the loan balance for all loans for mort insurance. On a $120k conv loan your PMI could be as high as $350/mo with very bad credit. On FHA it would be $50/mo as everyone is treated the same. You still have to qualify though.

MIP is rolled into the mortgage, the upfront standard 1.5% FHA requires can be paid by any number of sources, the most popular method is sellers concessions.

I went over a million loan packages and the best deal was an FHA loan. Sellers concessions paid for the 1.5% upfront, and .25% MIP for the first 5 years of the mortgage until the LTV ratio drops to 22% is a good deal. All said and done an FHA loan saved me 1.5% over the course of my mortgage on this house. There was no loan package available from my clients that offered a better deal. The value is already over the 78% LTV and if I really want to I can refinance before the 5 years is up, but I find no need to unless someone can beat the rate I'm getting.

I do not trust banks and variable rate loans, that is how they sucker you in and then take your money.

Its ok, we all have bad credit sometimes. 😉

 

[SampSon]

Its ok, we all have bad credit sometimes.

My credit was pristine at the time of that transaction. That was also for my first house. FHA rates are a good 1.5% lower than conventional, at least from the clients I deal with and the credit union my company is part of (I work in the real estate market).

Even with the decent cash I make 20% down was near impossible to do in a timely fashion. Also the interest I would pay on the secondary loan of the 20% purchase price would still be over the quarter of a point interest I paid for the first 5 years of my FHA loan.

The vast majority of first home buyers cannot afford to do a std conv 80/20 loan. 100% financing and FHA financing is very common and typically a very good deal for first time home buyers.