Question: Bob, I have been doing a little research. With the proliferation of low - and no down payment - 100 percent financing, and Congress considering allowing the Federal Housing Administration to underwrite such loans, why bother to accumulate a down payment?
- Bob Also
Answer: Bob Also, let me give you several reasons. One reason is that it's cheaper. The more you borrow, the more your overall costs will be.
The rate you pay will be higher because lenders tack on a premium when their risk is greater, and their position can be no more precarious than when the borrower doesn't have any skin in the game, or at least, none of his/her own.
The rate may be only a quarter point higher, which is not a huge amount. But you will also pay more in the way of points and fees because they are based on the amount you borrow.
You'll also have to pay (PMI) for some sort of protection - mortgage insurance, perhaps - that shelters the lender if you fail to make your payments. And here, too, the more you borrow, the greater the cost.
"This is where the real costs come from," said a couple of lenders I talked with. "Lenders need to be indemnified, and borrowers are the one who pick up the costs."
In addition, keeping the roof over your head if something goes haywire becomes far more difficult when you have little or no equity in the place. Indeed, you might have to pay to get out.
Equity, of course, comes in two forms - the money the homeowners themselves put into their houses through a down payment, monthly payments and improvements and appreciation as local (especially here in Lee County) housing values rise over time. But if the appreciation slows or even comes to a stop, it's going to take a long, long time to build equity, especially when you start out at zero.
And if you need to sell sooner than later - say you lose your job, get transferred to another city or split from your spouse - it's going to be tough, if not impossible, to pay back what you owe and cover the costs of marketing without digging into your own pocket.
"You might have to bring cash to the table instead of getting cash back," say a couple of the same lenders quoted earlier.
Consequently, it pays to save, save, save. If it takes a little creativity, so be it. So clip those coupons and toss the savings in a jar, or consider some other offbeat methods of raising cash.
(Next week: a few examples of those methods of raising cash.)
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL