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Buying Home with No Down Payment a Bad Idea

Dec 18, 2006 | | Comments Comments Off
 Dear Liz: A reader recently asked where she should put her money while she saved up for a down payment. You recommended using an online bank or certificates of deposit to generate more interest. If I had even $1,500 to set aside, I would buy a house now with nothing down rather than wait two years (as she planned to do). The market is great right now for buyers, don’t you think?

Answer: Anyone who buys a house with less than a 5% down payment is immediately “upside down” on her purchase. That means she owes more on her mortgage than she could net from selling the house because the costs of selling a home typically eat up at least 5% of its value.

Being upside down wasn’t a big deal when home prices were soaring and quickly building equity for us. Now that prices are dropping in many markets, however, those with little or no equity can be in a world of hurt if they can’t make the payments or need to sell. Today’s rising delinquency and foreclosure rates are testament to that.

Another downside of buying a home on a shoestring is that you may not have the resources to cope with the inevitable stuff that goes wrong: the furnace that breaks down, the roof that needs replacing or utility bills that suddenly soar. First-time home buyers are particularly vulnerable because they often have little idea of how much it costs to maintain and repair a home.

That’s why it’s a good idea for all home buyers, particularly novice ones, to have at least three months’ worth of mortgage payments in the bank after accounting for a 5% down payment and closing costs. That may mean waiting longer to buy a house, but you’ll increase the odds of being able to keep the home once you get it.

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