No Down Payment Spells Risk For Buyers

A study released Tuesday says that 43 percent of first-time homebuyers purchased their homes with no down payments in 2005, which could spell serious trouble for some homebuyers. As the market cools, and mortgage rates rise, these no-money-down buyers could end up owing more than their homes are worth, according to the National Association of Realtors.

While the fate of real estate bubble varies, depending who’s doing the speculating, there may be ample risk on the horizon for this segment of new buyers. According to the latest U.S. Market Risk Index, released by PMI Mortgage Insurance, Inc., there’s at least a 50 percent risk that prices will decline 11 major metro areas — including the booming markets of Boston, San Diego, Long Island, N.Y., Los Angeles, and San Francisco — within the next two years.

“If we do get a spike in mortgage rates, and a modest decline (in the housing market) turns into a rout, there’s almost no bottom to that,” said Dean Baker of the Center for Economic and Policy Research. “If housing prices fall at least 10 percent, it could be even more damaging than the collapse of the high-tech stock bubble in 2000.”

For now, the National Association of Realtors remains calm, expressing little concern that so many first-time buyers put no money down. The group has said, on more than one occasion, that it expects the housing market to “return to a more normal rate of price growth” in 2006, and that while home sales may slip, they will not do so enough to damage the market. The group calls it “balance.” Homebuyers and sellers, though, may call it a deflating market.

GOING THE NO-MONEY-DOWN ROUTE

It’s hardly newsworthy that the biggest challenge for most first-time home buyers is saving up enough money for a down payment. In places like Manhattan and even portions of the South Florida real estate market, it’s darn near impossible. As housing prices easily run into the mid-six figures and beyond for even modest dwellings, non-traditional mortgages that cover 97 percent of a home’s value have grown immensely in popularity.

The Mortgage Bankers Association reports at least one-third of homeowners choose higher risk loans, which include no money down, interest only or minimum payment options. It is notable, however, that the standard, 30-year fixed rate mortgage remains the most popular choice of home buyers by a considerable margin.

Although they sound like a good deal for cash-strapped buyers, a low- or no-money-down mortgage can end up being expensive. Not only will your payments be higher than if you put at least some money down (based on the simple logic that you are borrowing more money), you will likely receive a higher interest rate on a loan with a tiny down payment. Rates vary, but may run half of a percentage point higher than a conventional loan, lenders say.

Lenders figure the odds are higher that you’ll walk away from the loan if you have almost no equity in your home, so you’ll also have to buy additional mortgage insurance. That usually adds between 0.5 percent and 0.75 percent on top of your interest rate, according to the Mortgage Insurance Companies of America. Bottom line? You want to think twice before going this route, especially if you are not even getting a fixed-rate loan. It sounds obvious, but the more of your own money you use as a down payment, the less you will actually have to borrow from a lender. Also, the more you put down, the lower the Florida home loan rates you receive are likely to be.