More Choices For Zero-Down Loans

With rates moving up and home prices going in the same direction, lots of folks think it’s time to buy but not a good time to buy. Why? They want to get in on the bandwagon but unfortunately they don’t have any downpayment money saved up. Yeah, I know there are lots of programs out there with no money down, but did you know that a zero-money-down conventional program might not be your best bet?

Fannie Mae and Freddie Mac both introduced no-money-down options some time ago, with the interest rates on such products being slightly higher than for those that have down payments. The difference in rate for a 30-year fixed loan with 5 percent down and one with no money down usually varies by about .5 percent. And being Fannie and Freddie loans most every lender on the planet offers them.

The difference in payment on a $200,000 loan would be about $65 per month. Not a lot, but certainly something to consider. That $65 can add up over several years, so many might hesitate to take a zero-down loan. Perhaps sit this one out and save up some money or get a grant or a cash gift from a well-to-do family member. Not bad work if you can get it. But if you’re convinced that rates will soon move up much more than .5 percent on their own then in fact it might be something to consider.

One would also think that since zero-down loans are a common loan staple their rates would be better than for less popular mortgages. More lenders, more choices, cheaper rates, right? Not all of the time. There are “alternative” loans that have a zero-money-down feature and while they’re not underwritten to Fannie Mae or Freddie Mac standards they’re hardly issued by fly-by-night banks, either. And while the rate for these new loans will be a little higher than those using Fannie rules they also have one huge advantage that common conventional zero-money-down loans have: no private mortgage insurance, or MI. Not just any ol’ MI, but expensive MI.

Most know that mortgage loans with less than 20 percent down require some type of mortgage insurance. Some also know that the less you put down, the higher the mortgage insurance premium. It’s the highest for loans with no money down. On a $200,000 zero-money-down loan, private mortgage insurance will hover near $165 per month.

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