100% Financing on Mortgages
If you've gotten an email or a letter in the mail offering you 100% financing on your new home, you have to admit that it looks pretty tempting. No money down and no need to pay for your home right now seems to be a great deal for those new to the home buying market. However, there is more to this arrangement than meets the eye. So, you might want to consider what you're getting into before you sign up for this kind of mortgage.What are 100% Financing Mortgages?
Sometimes referred to as 80-20 mortgages, 100% financing mortgages simply cover the costs of the entire mortgage as well as the usual down payment. Since most selling situations require that you pay about a 20% down payment, this can cause some potential home buyers to have to wait until they save that money up. But with a 100% financing mortgage, you don't have to do that. With this, 80% of the mortgage will be through a traditional loan and the other 20% will be through another loan.
However, one of the first downsides to this loan (though it's standard in any loan) is that you still have to pay the closing costs of the mortgage transaction. And if you're someone that doesn't have a lot of money to spare, these smaller payments may still be overwhelming for your financial situation. Closing costs, however, may be able to be financed into the loan through the bank.
Why Would Banks Ever Offer These?
You might be wondering why banks would even offer these loans in the first place because they seem to be for borrowers that don't have a lot of money. And thus, they might not be able to pay for the loans. In these loan arrangements, the banks will have a higher interest rate offered, which will cause the borrower to have to pay more for the loan overall, making it advantageous for the bank. Even if the borrower has troubles with the future payments, the bank will still have more money coming in from the transaction than they may have with other loans.
Newer banks are offering these kinds of arrangements for those that already have good credit and who simply don't have the money for a traditional down payment. There are also some lenders that are targeting lower income families to help them get started on the path to home ownership.
Why 100% Mortgages are a Risk for the Borrower
Because the entire mortgage is based on a loan, you can have more troubles if you should fall behind on your payments. You don't really have a stake in this loan arrangement because you aren't putting any of your money into the transaction. When you begin to miss payments, you can have the bank or lender foreclose the home and leave you without anything for the payments that you did make.
You will also find that these kinds of loan arrangements are not very flexible in terms of your financial capabilities. If any change in the housing market occurs, you will probably need to increase your monthly payments, often causing you to pay much more for the home than the original asking price. This is going to cause a lot of troubles for the homeowner that may not have a lot of money to spare right now or is something catastrophic comes up when you are in the process of paying off the loan.
If the housing market should fall in your area, you might end up paying more than what the house is worth too. Because you've agreed to a certain loan amount, you still need to pay that amount back off, which can lead to a huge financial strain, as diminishing property values are often a sign of troubles for the local employers as well.
What You Need to Know
You might want to realize that while the idea of 20% down is something that you've heard time and time again, it's not actually the norm anymore. You can get loan arrangements for much lower payments, causing you to become a homeowner much more quickly than you thought you could. What you need to do is simply look around for different mortgages or 100% financing mortgages through different lenders. Many of these kinds of loans are directed at those with lower credit ratings, but there are also favorable arrangements that can be made for those with a higher credit rating.
The idea of a 100% financing mortgage is certainly appealing, but there are many disadvantages to this arrangement as well. Though you might want to 'save' as much money as you can right now, in the long run, you will be paying more than you might of with a standard loan arrangement. And that doesn't add up to savings for most people, no matter how much more convenient the loan is.
