What is 100% Financing?
Getting a home loan with 100% financing is exactly what it sounds like. You do not have to make a down payment on your home, but instead receive the full purchase price of the home in way of a mortgage. This full amount is reflective in your loan payments, which will be significantly larger than were you to put a 20% or more down payment.
Those who have heard of these loans often wonder whether they are the right way to go. Keeping more of your own money while still purchasing a house sounds like an extremely good idea. Then again, if you speak with those who have obtained these types of loans you will hear just as many (if not more) people tell you that a fully financed loan is a terrible idea.
Both sides of the fence have viable reasoning, which we will discuss here today. By the end of this article you should have a solid idea of whether a 100% financing loan is the right way to go for your unique situation.
High Default Rates
One major issue with fully financed loans is seen in the studies done on varying forms of mortgage options. Each of these studies has shown that those with fully financed loans have exceedingly high default rates in comparison to more traditional options. But why?
Experts do not fully agree yet as to why this is, but there are two reasonings which seem to be the most popular. First, these mortgages have higher monthly payments which make them harder to keep up with should financial hardships occur. The other reason might have to do with the discipline necessary for saving a down payment – a discipline which those granted 100% financing may lack.
Are You Cut Out to Own A Home?
It can be hard to take a hard look at yourself and decide whether you are ready to leave the renters life behind in lieu of owning your home. To figure this out, ask yourself the following questions. Be honest, because the only person you will be hurting overall is yourself.
- Am I ready to handle all home-related repairs myself? This could include the responsible hiring of contractors for some jobs and the ability to perform other repairs.
- Will I be able to afford the mortgage payments?
- Do I understand what it takes (and means) to own a home?
A Down Payment Is the Better Option
If you can make a down payment on your home, you should. There are several reasons behind this. The most obvious reason is that your mortgage payments will be lower monthly, thus making them more affordable for long-term upkeep.
Many people choose to do an 80% home loan with a 20% down payment loan – also called a piggyback. Although this appears like a promising idea at first, it has a major drawback. The money placed into the piggyback loan will end up being much more than the initial cost due to interest rates and other associated fees. It is significantly cheaper to simply make a 20% down payment yourself if able.