Loans Explained

/ Loans Explained

Summary: Nearly half of all first-time homebuyers financed the entire cost of their home, rather than paying a hefty down payment.

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Article Body: Nearly half of all first-time homebuyers financed the entire cost of their home, rather than paying a hefty down payment. And many of these zero-down buyers did so thanks to the so-called / mortgage plan. This is a relatively new type of loan that was especially designed to help buyers who want to avoid paying down payments. As housing prices have skyrocketed, more and more buyers with good credit and strong income find that they cannot afford a home because of the difficulty in saving up enough to make the large down payment. On a home worth $,, a percent down payment is a whopping $,. To respond to this challenge, mortgage companies began offering the / option.

Sometimes the / is referred to as a piggyback loan, because in reality it is two loans working in tandem as one. The first part works in a conventional way, and is for % of the purchase price. The nd part the smaller one is a % loan. So when you apply for your mortgage, the lender actually qualifies you for percent of the purchase price of your home, and then divides the loan into two sections.

For example, if you want to buy a house worth $,, the down payment of percent will cost $,. With an / mortgage, the lender gives you $, at one interest rate, and then gives you the percent down payment of $, at a somewhat higher rate, for a grand total loan amount of $,.

The reason for splitting up the mortgage into two distinct parts is to help you qualify for the loan without a down payment. Normally you have to put percent down to get a conventional percent loan, so with this rather clever mortgage plan, the lender is letting you borrow your down payment. Then the same lender can turn around and let you borrow the rest of the loan.

Yes, it does sound a little bit contrived, and it is indeed a rather complicated way to arrive at a basic mortgage. But what really counts for those trying to avoid a big down payment is that it works, and helps to overcome the down payment hurdle.

You can expect to pay higher rates on the down payment or percent portion of the loan. But the rates are still reasonable, and this loan arrangement allows you to buy without first saving massive amounts of money to use for your down payment. Later, if you decide to pay off the percent loan to lower your monthly payments, that is an option available to you. Many homeowners refinance once they have had a few years to increase their equity, and convert their / into a more traditional type of mortgage.