Zero Down Payment On A House Is Just Fine

by Mike Holman

Now that we are in the sub-prime era, it has become very fashionable to declare that home owners that bought houses with little or no down payment are a big reason why foreclosures are at record levels. I have to respectfully disagree.

In my opinion, when buying a house, it doesn’t make a big difference how much of a down payment you have. Ideally, if you have 20% or more then you save on fees and interest which is a good thing, but if you are set on buying a house and you have don’t have anywhere near 20% then I wouldn’t worry about it.

The down payment has nothing to do with the affordability of the house

Your ability to make your mortgage payments will determine how well you can afford your house which is completely unrelated to the size of the down payment. In other words, it’s the size of the mortgage that matters. Now you might be thinking that for the same house price, a larger down payment will reduce the mortgage which will reduce the payments. This is true, but unfortunately most house buyers don’t think that way. Typically they will look at how large a mortgage payment they can afford, figure out a maximum mortgage and then add their down payment to the maximum mortgage to give them their maximum house price. This of course will get thrown out the window once they start looking at houses but that is at least, how the initial house price maximum gets calculated.

An example

One house owner, let’s call him “Mike” bought a house for $168,000 with $20,000 down payment. Because he only had 11% down payment he had to pay an extra insurance fee of $3700 which left him with a mortgage of $151,700. With a 30 year amortization mortgage at 6%, his monthly payment is $902.

Another house owner, let’s call her “Sue” bought a house for $268,000 with $53,600 (20%) down payment which left her with a mortgage of $214,400. She avoided any extra fees because she had the 20% down payment and she also qualified for a better mortgage rate of 5.6%. Her monthly payment is $1222, 35% higher than Mike’s payments!

In this case, Mike’s house was more affordable even though he didn’t have as big a down payment as Sue.

Down payment is only one factor

Having a larger down payment is preferable to a smaller down payment, but not having an arbitrary percentage shouldn’t stop you from buying a house. It’s important to look at all the numbers which affect your ability to afford the house – mortgage payments, taxes, utilities, maintenance etc and decide if it make sense to buy a house with a small down payment or wait until you have a larger one.

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