Thursday, February 15, 2007

The No Down Payment Craze

Remember the days when homebuyers – both first-time and repeat – paid a sizable down payment for a house? You may have to stretch your memory, but even two decades ago the standard home buying scenario required an average 20% down to close on a property. Some of today’s buyers pay not a penny down.

So where does this change come from and what are the consequences?

The primary reason for lower and lower down payments is obvious. Home prices have skyrocketed – even when adjusted for inflation – compared to the affordable prices of the ‘80s and early ‘90s. Swiftly rising price tags mean it’s no longer possible for young, first-time buyers with less income to pay even 10 or 5% of the home value upfront – meaning they are forced to take out close-to or the entire value the house in mortgage loans.

Okay, maybe ‘forced’ is not the right word – the second reason so many home buyers are financing the entire cost of their house is the rapid increase of no- or low-money down loans, both from public and private lenders. Often times these main mortgages cover the cost of down payments with ‘piggy back’ loans and other financing options.

Such popular loans have created a boom in home ownership in the US – currently at a record high of 69%, the NAR reports. This increase is due to the rush of first-time buyers that otherwise would not have enough ready-cash to cough up a substantial down payment.

Great news, right? Even lower-income first-time buyers can now afford to purchase high ticket-priced homes. Well, there are obviously some consequences.

One of them is stilted appreciation. Ten or fifteen years ago, taking out a low-money down loan was acceptable because high appreciation rates usually covered first-time buyers when they sold and upgraded housing. But today’s home appreciation rates vary wildly. Those who start out with no or little equity could face the same fate when they choose to sell their home years down the line.

So as much as these no- or low-money down loans are a godsend for low-income families trying to buy their first home, it can also be a slippery slope. As usual, your parents probably know best – earlier generations tended to put 20% or more of their home’s value down upfront, ensuring lower mortgage payments and quicker repay schedules.

Getting a great investment at little upfront cost can many times pay off in the short term, but make sure to invest wisely and make a decision that will pay off handsomely in the long term as well.

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