Should You Buy a House With No Money Down?

Here's a piece from Kiplinger's where a couple asks whether or not they should buy a house with no money down. You know what I would say (more on that later), but here are some of the reasons Kiplinger's gives why you should NOT buy a house with no money down:

• Saving for a down payment will lower their costs and give them both security and flexibility.

• Equity in your home also gives you a source of cash in an emergency.

• The bigger the down payment, the lower your monthly payments, which may mean one of you can afford to stop working, if you wish.

• Buying a house with no money down comes at a price. With less than 20% equity in a home, you'll generally have to buy private mortgage insurance, which costs up to 1% of the loan amount.

Ok, here's my answer to "should you buy a house with no money down?" in as short of a space as I can put it:

No.

Why? It's contrary to my preferred formula for buying a house. Besides, the only way you can get a house without a down payment is to take out an evil house loan -- which is something you don't want, especially with what's going on in today's housing market.

Comments

[Wendy]

This makes sense to me.

[Henry]

At the rate I'm saving for house, it'll be 2 years or so. What if it takes a few years to save the 20%?

[PMad]

A year an a half ago, I (and my wife) purchased our home with no money down. As first-time homeowners, the interest rate we got was about 0.5% above the typical 30-year fixed rate at the time. For us, it was about getting out of the renting game and into a home we could make our on. We now pay about $350 a month more for our mortgage than we were paying in rent for a home of compariable size (but with a yard/garage/basement). A year and a half later, I couldn't be happier with the decision as I'm sure that we'd still be saving for that 20% down payment.

[Larry Nusbaum]

100% buyers are avoiding PMI by gettong two loans: an 80% first and a 20% second in the form of a line of credit. What it does is allow the borrower to save the down payment (20% second)while living in that house!

[Rob D.]

One thing is sure in life - your rents will continue to rise.

As long as you can afford to pay the monthly nut, owning - even with a no money down mortgage seems to make more sense then renting. You get to lock in your monthly payment, get great tax incentives, put down some roots, enjoy a great investment....

[HENRY!]

That's a great idea. PMI is terrible. A necessary evil, but terrible.

[cory]

I also bought a house with $0 down, about a year ago. I did an 80/20 piggy back loan instead of PMI, with the 80% @ 6.25 (30-year fixed) and the 20% @ 8% (20-year fixed). The mortgage payment is well within reason (PITI is <25% of gross income), I can still afford to pay a little extra each month, I am renting out space in the house for extra income, and saving that 20% would have taken me about ~5 years.

In the 10 months since I bought, comparable property prices in my neighborhood have gone up by about 10k-15k and show no signs up breaking (locally, there is no real estate bubble), which means that if I had waited, I would have not only been priced right out of my city, but I also would have missed all that sexy rental income, and would not have had the delicious mortgage interest tax deduction which essentially reduces my tax burden to nothing.

Instead, I have a fixed rate loan that is probably going to be well below the going rate for years to come, extra money each month (Im paying less to own than I was to rent)

My point here: Just saying 'No.' to a $0 down mortgage is nothing less than shortsighted.

[Meaghan]

I think buying with no money down is a recipe for disaster. For some people it works out fine- but a job loss or medical emergency, or even a move, combined with falling real estate prices, could force an owner to sell owing more on his or her house than it's worth. And combine a no-money-down purchase with an ARM makes the situation even worse if interest rates rise while valuations go down.

[HENRY!]

Quite the debate. Please keep it going as I am buying a house as early as next year. The problem is that I live in an area where a "low" starting price starts at $350k. Yowzahs!

[Bryan C. Fleming]

Yes, in a lot of areas the price of houses is pricing people out of the market. Add to that how little people save and you've got a problem. Not many people can buy a house. Hmm... How do the mortgage companies fix this?

$0 money down!

Boy their smart (and in only in the business of selling you money).

I like this one:

"Equity in your home also gives you a source of cash in an emergency."

Man that's funny.......

- Bryan
http://www.BryanCFleming.com

[Clay]

I bought my home 2 years ago with a 80/20 loan. Some people thought it was a bad decision, but after a year my home was worth $40,000 more than what I bought it for and I was able to refinance at a low 6% rate.If I would have never took the risk I would have never reaped the reward. My advice though, is to find a house well below market value because the equity, in my case, was free money that helped me obtain some goals I would of had to wait years for. Also remember not to look for a house that you know will strain your budget. Buy small let that equity build up then buy bigger.
I will never pay for a house I can buy for free!!

be smart... Clay