Does It Make Sense to Skip the Down Payment?
Making a down payment can save you a lot of money through the life of your mortgage. But, the hardest part of buying a home is the money up front. With closing costs, inspections and appraisals, the price tag can get pretty steep, and none of this actually goes toward the home itself! You spend a fortune to be able to purchase a home, but it’s almost as though you don’t get credit for it. After preparing for thousands of dollars in closing costs, you are faced with the next hurdle: the down payment.
If it is at all possible, you want to make a down payment. Even if it is as little as 5% of the home, a down payment can save you hundreds of thousands of dollars over the life of your mortgage. Also, a small down payment means that your Private Mortgage Insurance (PMI) payments will end sooner, and you are likely to get a more favorable interest rate. By getting your down payment up to 20%, you can avoid PMI completely, putting hundreds of dollars back into your pocket every month.
Clearly, it makes sense to put money down. But, it’s not always that easy. Rising home prices are pulling down payment sizes upward as well. For most people, the issue is affordability. Most people do want to make a down payment, but they simply cannot afford to do so. “No money down” mortgages are available, but there are a few things you should consider before applying for one. Look at your estimated monthly payments. If you can afford one, a no money down mortgage will work. This is often the case in expensive rental markets (e.g. New York, Boston or San Francisco). High rents make it difficult to save enough for a down payment, but a mortgage may not cost much more than the rent.
Also, think about your credit. If you have a high FICO score, the interest rate on a no money down mortgage will be a bit lower. Start with the no money down mortgage, and refinance a few years later, after you have saved enough for a down payment. Remember; you aren’t stuck with your first mortgage for the rest of your life. You always can refinance later for more favorable terms, particularly a lower interest rate.
No money down mortgages may not be ideal, but they do serve an important purpose. If you can handle a high monthly payment but have trouble saving money for a down payment, skipping the down payment may be the right move. Revisit your mortgage in a few years, though, to refinance for a lower interest rate.
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