Although the U.S. economy continues to hum along, current conditions have created some very real barriers for would-be homeowners, making it hard for people to save for a home.
Lenders traditionally require that you put about 20% down, but some may let you put as little as 3% or 5% down depending on your credit score and other factors. More recently some lenders are even letting you buy a home with a 1% down payment!
Should You Get a 1% Down Payment Mortgage?
While a 1% down payment mortgage sounds like a good deal, money expert Clark Howard says it could end up being a big mistake for your wallet.
Let’s say a home costs $300,000. For a 1% down payment, you only need to come up with $3,000.
“Usually to get in a home, you need 5% down and so you’ve got to come up with $15,000 in that scenario,” Clark says. “And for a lot of people, that’s a bridge too far. So when somebody comes along and says you only need 1% down, they’re like, ‘Great! I’m going to do this!’”
But Clark says what usually happens is you end up owing more than your home is worth and “you’re upside down on your home.”
Why a 1% Down Payment Mortgage Is Bad for Your Wallet
“If you finance 99% of the purchase, instead of 95 or 90, your monthly payment is now based on a higher balance and then in turn at these higher rates, you have a higher monthly payment,” Clark says.
In addition, a 1% down payment will almost certainly mean that the lender will tack on mortgage insurance premium (MIP) or private mortgage insurance (PMI) to your loan. That means you’re going to have an even higher monthly mortgage.
Home Values May Not Compensate
When you pay so little down on a home, you’re making a big gamble that home values will escalate between the time you buy and the time you sell. The way today’s housing market is going, that’s a risky bet.
“And so when you go to sell a home, with commissions, and other selling expenses and all the rest, if you borrow 99% of the cost of the home, you’re going to be upside down when you need to sell, which means you’re going to have to bring money to the closing table to sell,” Clark says.
Clark wants you to take out as high of a down payment as you possibly can, which will lower the monthly note. But he understands that for a lot of people, that’s simply not possible right now.
If the economics don’t work for your personal situation, look for a rental and wait for the market to improve.
If you go ahead and buy that home with that 1% down payment, “it makes you more subject to potentially ending up in a foreclosure situation. That’s really ugly,” he says.
“So this is something where I can’t think of circumstances where I’d recommended it,” Clark says of a 1 % down payment mortgage.
Want more home-buying tips? Read up on how to calculate how much home you can afford.