Posted by lo on December 11, 2002 at 08:10:34:
Pros-The ultimate leverage. You can get into your
next property sooner.
Cons-A slightly higher interest rate.
A higher payment
If you have to sell…with a realtor, you could
be upside down in the property the first year
zero down financing - Posted by Isaac Williamson
Posted by Isaac Williamson on December 10, 2002 at 21:26:25:
What are the pros and cons for zero down homes
Over-leverage - Posted by Steve D
Posted by Steve D on December 11, 2002 at 08:10:42:
If you are buying at full market value, zero down can be dangerous. If your buying at 80% of the property value, it can be a great way to go.
The danger with 0 down at FMV is as follows:
- will probably by an 80% 1st mortgage with a 20% second at a slightly higher rate, or pay PMI. In most area’s, it means if you move and have to rent the place out, it will not pay for itself.
- If you have to turn around and sell it quickly - as a seller you’ll most likely have to pay 6% closing costs (3% each to sellers and buyers realtor), other closing costs, you may get bids a few thousand less than you paid, you may have to make a few mortgage payments while you are trying to sell the house - can put you many thousands down on the deal very quickly if you need to get out in a hurry.
- Markets go down as well as up. 12 months after you purchase, there is a possibility that it will be worth 20% less than you paid for it, and will rent for only 80% of what you need to cover the payments.
If you are buying way under market value, zero down can work great. If you buy at zero down at FMV, and the market goes the wrong way short term and takes 10 years to recover (it happens), then you are either stuck in the house unless you can come up with the difference to sell it, or if it’s a rental stuck with negative cashflow every month… if you have large cash reserves, then thats less of a problem (but your money could aloso be working better elsewhere).
Basically the higher leveraged, the greater the risk - worst case if the markets go down and you can’t make the additional payments needed, and you don’t have the funds to get out of the property, are foreclosure or even bankrupsy.
The pro’s are pretty straightforward, more cash to invest elsewhere is always good.