4 Reasons to Avoid a No Money Down Mortgage Loan

If you are looking into applying for a home mortgage loan, there are plenty of options. This even includes a no money down option, which may sound tempting because it keeps more money in your pocket for the time being. However, here are four reasons to avoid doing this:

  1. You Pay Higher Interest: When you apply for a no money down mortgage loan, you are paying 100% of the purchase amount for the house on the loan. This is going to lead to a much higher interest rate because you are borrowing more money. Typically, a no money down loan would require you to basically take out a second mortgage to cover the cost of what you would otherwise be required to put down on the house. In general, second mortgages have higher interest rates, as well. 
  2. Your Monthly Payments Are Higher: When you apply for a no money down mortgage loan, your monthly payments are also going to be really high. This is because you are borrowing more, but are still trying to pay it off in the same amount of time that you would if you were to put money down. 
  3. You Might Have to Pay for Private Mortgage Insurance: When you borrow more money, the lender may require that you purchase private mortgage insurance, which is just another way that your monthly costs on the home are going to increase. Private mortgage insurance is typically required because it protects the lender in the case that you don’t make your payment. 
  4. You Have to Keep a Steady Income: When you apply for a no money down mortgage loan, you aren’t going to want to miss any payments that put you in a worse situation financially. This can increase interest rates and increase monthly costs even more in order for you to be sure that you are still able to pay off the loan in the amount of time agreed to. If you were to lose your job or get demoted, there won’t be much wiggle room for you to make lower payments for a temporary amount of time.

Although applying for a no money down loan may seem desirable, it can put you in a poor situation financially. The best option is usually to save up for a down payment before you purchase a home. Of course, you can apply for an FHA loan, which requires no money down or at least very little money down. These can be a better option since they are government funded loans that protect the borrower more so than a no money down conventional loan would. If you have questions, discussing your concerns with your bank or someone equally familiar with mortgage loans.