Before the housing bubble popped in 2008 there were a number of different ways to finance a home purchase. There was the conventional 20% down payment. There were adjustable rate mortgages that started with low monthly payments and a temporarily low interest rate that would reset after 5 to seven years. There was the 80/15/5 loan package that was essentially two mortgages: a first mortgage that covered 80% of the purchase price, a second mortgage at a slightly higher interest rate that covered 15% of the purchase price, and then finally a 5% down payment. There were FHA loans that would cover 96.5% of the purchase price with a cash down payment from the buyer of 3.5%. There were loans structured to pay interest-only installments at first with principal payments kicking in a few years down the road. And then toward the end there were loans that were 100% financing loans, or “no money down” loans. For those people who absolutely didn’t have a dollar to bring to the closing table there were even 105% loans. After the housing bubble broke, most of these financing options went away. Today almost all of them are back. It is left to the individual consumer to decide whether or not that is a good thing.
The main thought behind all of these creative financing options was the belief that home prices could only go up. In this rosy scenario, even if you took out a 105% mortgage the value of the property you bought would soon catch up with what you actually borrowed to buy it. A few years into your mortgage your house would increase in value and you would be a happy home owner with equity that magically increased almost over night to cover your risk. We all know how that turned out.
The truth is that if you’ve never owned a home it can be nearly impossible to come up with 20% of the purchase price for a down payment. Many times these alternate forms of financing are the only way some families are going to be able to get into a house. So if you’re thinking about buying a home and you are considering one of these “creative” ways to finance your purchase you need to go into the decision fully informed.
Understand that first of all, if you don’t put at least ten per cent down on your house at close, you are going to be upside down on the first day that you move in to your new castle. It’s not that hard to understand why. While houses are not like new cars that lose 20% of their value when you drive them off of the lot (most of the time), there are still expenses that you incur when you sell your home. If you move in and then immediately find the need to move back out there won’t be enough equity in your property to cover the selling expenses. In a case like this you will be bringing money to the closing table when you sell the house that you didn’t bring to the closing table when you bought house. That’s the risk you take. If you decide to live with that possibility then you go into your purchase with eyes open. The less you put down when you buy the house, the more you may need to bring to close when you sell it.
Remember that the longer you live in your new home, under normal circumstances the less this will be a factor. In this area you should expect an annual increase in your home’s value of roughly 3% each year. Currently that rate is actually higher because the market in the Tulsa area is correcting itself. After five years of declining values prices are rebounding. In the past year we saw an average increase in home prices of roughly 12%. This is not a long term norm and overall prices still haven’t recovered to pre 2008 levels. That will take a bit longer. But in a healthy market if you put a decent down payment on the table at close and then live in your home for at least five years, when it’s time to move you should have breathing room to market your home at a competitive price and deal with buyers without the discomfort of trying to sell a home that won’t cover your expenses to liquidate it.
No one can tell you what’s best for your situation. Only you can know that. But at the very least you should have all of the information available so you can feel comfortable that you’ve made the right decision for your family. If you want more information or if you have questions about financing a home purchase you can email me at bert(at)bertwilliams(dot)net. I am not a mortgage broker but I know several good ones. I can get answers for you and put you in touch with some mortgage professionals that will help.