How do zero-down mortgages work?

[TrogL]

My wife thought she had a deal on a zero-down car loan until she read the fine print and saw how much the finance charges were going to be. I had to loan her money to make a down-payment and get the rates someplace reasonable.

Is it the same thing with these zero-down mortgages? I don't have $15,000 lying around doing nothing.

[ewagner]

1. Usually with something called PMI

Or private mortgage insurance........adds to the payments but keeps from having to put down a 20% down payment......

[Timefortruth]

3. There are FHA loans also,

that do basically the same thing for a little less.

Food for thought:

Owning a home is very expensive, pipes break, roofs leak and so on. When we bought our first house with basically no money down I was stunned at how much more we had to spend over when we were renters with payments the same. Even still I'm not all that sure that home ownership is all that it's cracked up to be. Guesstimate that you will spend 20% more than your mortgage payment on maintenance and repairs, and you will need a standby fund in case a non-covered disaster strikes.

[madrchsod]

2. yes, same thing

really adds up the interest payments over the life of the mortgage. not a good deal-well for the mortgage/banks it is...

[bratcatinok]

4. It depends on the loan product.

When you're talking about a zero-down mortgage, normally that refers to no down payment. You would still be responsible for those fees that are traditionally charged in your area. In my area the borrower pays for the origination fee, credit report, appraisal, survey, part of the title company charges, an underwriting fee and enough to set up an escrow accout for taxes and insurance. Different mortgage companies will have different fees, some may charge a processing fee or courier fee or may charge all of the above to the borrower.

Most zero-down mortgages will have a higher interest rate because there's more risk to the lender since the buyer has no equity to protect. It's easier for a buyer to walk away from a property when they have little invested in the property.

The majority of fees charged by a lender will be considered as part of the finance charges. A very simplifed explanation of what is a finance charge and what isn't is; if you wouldn't pay the fee if you were paying cash then it can be considered a finance charge. Note that's a simplified explanation and isn't how RESPA determines what constitutes finance charges. Discount points which one may pay to lower the interest rate are not considered part of the finance charge.

Many people get confused when they receive the Truth-In-Lending (or RESPA) disclosure because they may be locked in at an interest rate of say...6.0% and yet the TIL will show their interest rate to be 7.118. The reason for that is because of the above mentioned fees which are considered part of the finance charge. Your monthly payment will be based upon an interest rate of 6.0% though and also will include any escrow for taxes and insurance.

Have I made this as clear as mud? :)

[MsUnderstood]

5. Here is my experience

I'm sorry to hear about your wife's experience. Buying a car is a crazy negotiation and it is easy to get tricked if the Car Dealership is not on the up and up.

Anyway, I got a zero down mortgage. What my broker did was finance my first mortgage at a rate slightly higher than the average, then get a second mortgage (government approved plan) with the same interest rate that covered the closing costs.

I later refinanced and combined those 2 mortgages into one mortgage to simply the house financing.

In both cases, I was required as a part of the contract to get "Mortgage Insurance" which is insurance, payable to the financing company in the case that I default. It costs about $100 extra a month.

This requirement is if you don't have 20% equity in your home. If you get to the point where you have 20% equity in your home and have been in your home for 1 to 2 years (and never made a late payment) you can petition your finance company to drop the Mortgage Insurance. You can also refiance (with a new appriasial on the house) to increase equity and get rid of the mortgage insurance.

With rates low and house value on the increase most people who have bought with 0% in the last several years will certainly be able to remove it from their payment.

[Blue-Jay]

6. Pay as much as you can afford at the loan's inception.

Every dollar you spend at closing will earn you a better interest rate. Plus, that money goes directly to the principal balance of your loan. As all homeowners here can attest to, most of your early payments get applied directly to the interest on the loan, and not the balance.

Some will disagree with me here: I'm of the school that thinks you shouldf pay extra on every monthly payment to be applied to the principal balance of your loan. Some will say that you should invest that money for a larger return, but there are distinct advantages to shortening your PIF date (paid-in-full). Real estate is one of the only industries that has consistantly shown a healthy return in the past 50 years. It's the safest way to ensure that you'll come out ahead in the long run.

Sure, you could invest the extra funds, and maybe turn a tidy profit. It's more of a question of your drive to turn a profit. Investing in a higher-return might make you a whole lot of money, but it might also break you if your chosen investments eventually tank in the market. An extra $100 towards the principal balance of your loan can conceiveably cut your PIF date in half, based on the value of your home.

Just my opinion, though.

[bratcatinok]

7. I agree with you about paying off early

especially if this is the house you plan on living in forever. The quicker you payoff the loan, the less you pay in interest. That can be a substantial amount you end up saving!

I do have to quibble with you about your statement "Every dollar you spend at closing will earn you a better interest rate". The fees the mortgage company, title company and closing attorney charge won't earn you a better interest rate. The down payment will only affect the interest rate if you're going for 100% financing. Normally you'll get the same interest rate whether you put down 10% or 50%. The only difference is if you put down less than 20%, you'll have to pay PMI (private mortgage insurance).

As someone said in another post, you can request PMI be discontinued on your loan once you have 20% equity. You may have to pay for an appraisal to prove you have at least 20% invested into the property.

[wryter2000]

8. My 0 down mortgage

My 0 down mortgage ended up costing me about $12K in various fees and things...including pre-payment of property taxes and insurance.