The mortgage loan that you choose will be one of the most important decisions you will make. You will be spending a large percentage of your life paying off the mortgage. Therefore, it is essential that you carefully choose the mortgage for your home. One of the challenges of getting a mortgage is that you are often required to place a substantial down payment on the home. However, it is sometimes possible to obtain a mortgage with little or nothing down. But is there a catch?
Putting No Money Down Increases What You'll Owe Overall
Putting no money down increases your monthly mortgage payment. You will also have to pay interest on the entire value of your home, so this decision will cost you the most money in the long run. However, if you will be able to afford the monthly payments in the foreseeable future and if you do not want to spend a sizable amount of money on a down payment, it would make sense that you would be willing to pay more overall.
You Might Not Have Equity When It Is Time To Sell
If you do not pay anything at all at closing, you will have to wait several years before you have any equity in your home. If you are unable to build equity in your home, it may be difficult to sell it in the future without still owing on your mortgage. This is because homes very rarely sell for the maximum sale price. Therefore, if you will be obtaining a mortgage with no down payment, you will need to have a plan for staying in your home long enough to build some equity. The other option is to have money saved that you can bring to closing in the event that the home sale does not cover your closing costs.
There are several options that allow little or no money down:
- FHA Loans—for first-time home buyers
- VA Loans—for veterans
- USDA Loans—for rural property buyers
FHA loans must be appraised by an FHA appraiser and must meet certain conditions. Also, there is a mortgage insurance premium that is financed into the mortgage and will increase the overall cost of the mortgage. The premium must be paid for 11 years.
VA loans have a VA funding fee that is financed into the loan, increasing the size of your mortgage. However, if these downsides are acceptable, it can still be a great idea to get a mortgage with little or no money down.