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No Down Payment? Step Right Up Staff - Mortgage Lenders Plus.com

Not many of us can afford a twenty percent down payment on a home. That’s the traditional entry fee, which entitles you to obtain a thirty year mortgage with a fixed interest rate. You make the same payment every month for thirty years.

Those were the good old days. Because of today’s housing prices, there is a jungle of mortgage options that include ten percent down payments, five percent down payments, all the way to the no down payment home loan. They range from complicated to baffling and it is critical for any would-be homeowner to understand what ALL of the terms are in a no down payment mortgage.

These mortgages are all adjustable rate mortgages (ARMs). Today, there are variations on ARMs that can make your head swim. Getting into a home with no down payment mortgage usually involves one or more of these loans.

One of the variables popular with no down payment home loans (known as 100% financing) is the interest only ARM. This loan provides that you pay only the interest on your mortgage payment for the initial term of the loan – usually two or three years. Often, that interest rate is also set at an artificially low rate. Thus when the loan “readjusts” to the real mortgage premium, the increase can be up to eighty percent.

The sticker shock on these no down payment mortgages when they adjust has stunned many homebuyers who simply did not understand what they were getting into. If your ARM has had a five year grace period, the option of refinancing may be available because you may have built up some equity in the home. But if you have been making no payments on the loan principal, any home equity you have in the home has come through appreciation in the value of the house. While that has been a sure thing over the last five years, it isn’t any more.

The “option ARM” also begins with artificially low interest rates and other teaser payment options, so it’s possible to develop “negative amortization” through the loan. This no down payment home loan can result in more debt on the home than it’s worth on the market. This not only precludes sale of the property, it rules out refinancing as well.

It’s also important to understand how your ARM adjusts and how often it does so. Some ARMs are tied to a money market index. The interest rate on your no down payment home loan is set at the benchmark index rate plus the additional “margin” as defined in the mortgage. That rate can adjust once a year, or every five years. It can adjust up, but in many no down payment mortgages there is no provision for a downward adjustment.

One hundred percent financing is going to lock you into a loan with built-in risks. You need to understand those risks, and what it will take to make a change should you be able to refinance. Many ARMs have substantial prepayment penalties; something that you should absolutely avoid. You also need to consider the possibility of living with the no down payment home loan when it readjusts – if you can’t, you’ll lose your home.