Getting 100% financing with bad credit can get you into a home with little out-of-pocket expense. However, higher rates will make the loan more expensive than financing with a down payment. There are some cases when zero down can be a benefit, especially if you plan to move or refinance soon.
The Cost Of Zero Down
Zero down will cost you more with higher interest rates. These rates will also increase your monthly payments. Some financing companies also require you to pay additional points or fees at closing. It is best to request quotes for 100% financing from many lenders to find the best offer.
You can reduce these rates with an adjustable rate mortgage (ARM). These types of loans are the easiest to qualify for and start with lower monthly payments. The only drawback is that rates and payments can increase over time. But you always have the option of refinancing to lock in your current rates.
Saving On Living Expenses
While 100% financing can be expensive, it will save you money on living expenses. Purchasing a home is an investment, unlike rent. Your monthly payment is increasing your home�s value. Time and market demand will also increase your property�s value.
By working with a subprime lender, you don�t have to worry about private mortgage insurance (PMI) with zero down. Lenders absorb the risk with the higher rates. You also have the tax deduction of your interest payments each year and in some cases, the closing costs of the loan.
Financing Based On Your Future Goals
Zero down loans do have a place for homeowners. If zero down means the difference between renting and owning, then invest with the 100% financed loan. By keeping some cash reserves, you improve your credit score and protect yourself from a financial emergency.
If you plan on moving or refinancing in a few years, then a zero down loan doesn�t have the full financial impact. Since you are paying interest on a short period, you don�t suffer years of higher rates.
As with any type of mortgage, shop around for lenders. Be honest about the financing package you want. And remember, you can refinance for better rates and terms as your credit score improves.