100% Financing…..is it too much of a good thing?
If you are looking to buy a new home and you’re thinking about a 100% loan, there are some things you should consider before making your decision. Is this your first home purchase? If so, 100% financing could be the easiest way for you to go from renting every month to building equity every month. The additional tax savings of owning versus renting would also lower the risk of 100% financing.
Second, do you have assets that you could use toward the purchase? If you have assets that you could put down but are choosing to hold on to them because they are invested some other way, 100% financing can be an attractive mortgage option.
However, if you have no money saved, are having trouble scrapping together enough money for closing costs and/or are expecting to get seller paid closing costs, you might want to reconsider.
I’m not suggesting individuals trying to get into their first home should necessarily wait until they do have money for a down payment and closing costs but I am recommending caution in purchasing any property with 100% financing.
100% financing programs were designed to let people get out of renting and into home ownership more easily. For young adults, just beginning their careers or young families looking for that first home, 100% programs provide opportunities for homeownership that would otherwise be unavailable.
When is 100% financing not a good idea? Just like interest-only programs, if you are buying a property that is beyond what you can reasonably afford and have no reserve assets, 100% programs could put you in jeopardy if you experienced an unexpected loss of income. Also, if you are in a job that could have you relocating unexpectedly or within a few years of your purchase, you may find that you don’t have enough equity to cover the expense of selling the house and still payoff your mortgage in full.
I never recommend 100% financing for investment property. Unless you are buying the property far below market value and can generate a positive cashflow of $250 or more each month, 100% programs for investors hold significant risk. As with all investments, you can not predict absolutely what the future holds. If your investment property doesn’t appreciate, is vacant for any length of time or requires unexpected maintenance, you will be more likely to suffer a loss with a 100% loan.