Saving Makes a Difference

Sure, you can go out and buy a home, do a mortgage of 100% of the purchase price and maybe even have the seller pay your closing costs but is doing so the best idea financially for you?  The benefits of having no money down when you purchase the home are clear: You don’t have to come up with a bulk sum of money at closing and you may have more disposable money to use for furniture, painting or whatever else you need for your new home. But what are the downsides?  As with everything in life, there are two sides.

1) You have no equity in the property whatsoever.  What happens if the value of your home goes down?  You will owe more on the property than what it is worth.  Also, since equity is earned slowly on a longer term mortgage (most 100% financing is done on 30 or 40 year terms), if you were to need to sell the home in the first few years of ownership you still may be required to bring money to closing.
2) The interest rate may be higher.  By putting little to no money down on a home puts the lender at a greater risk.  The lender raises the interest rate to help offset that risk.
3) If your lender requires that you have Private Mortgage Insurance (PMI) on your loan the monthly premium that is paid will be higher that if you put money down on the property.

Putting money down on a purchase of a home will alleviate most of the issues above.  You have instant equity in your home, you will have shown the lender that you are willing to put some of your own risk into your home, and depending on how much you put down you may not be required to have PMI or the premium amount will be less each month.

But what if you don’t want to wipe out your hard earned savings just so you can make a down payment on a home?  If you need or want to do 100% financing you can, but my recommendation is still save as much money as you can before buying.  Showing you have reserves (money saved up) will your overall profile.  If a lender sees that in your savings account you have 3 months worth of mortgage payments saved up it lessens the risk you would have trouble making payments if you came into a rough patch.  The more reserves you have the better.

At application make sure your lender knows if you plan on making a down payment.  Also provide your lender with all your assets.  Your assets would include checking/savings accounts, CDs, IRAs, 401k, cash value in life insurance, stocks, bonds, and mutual funds.  Proving this information can make your approval that much smoother.

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