With the cost of homes rising faster than Harry Potter’s popularity, many home buyers are feeling the crunch.
In the not so distant past, it was much easier to save up five or ten percent for a down payment on a house. Today, coming up with even a modest 5% down payment translates to about seventeen thousand big ones for a home in the Portland metro area. (The median home price in Portland, Oregon is now $345,000.)
Add in closing costs, and you’re paying quite a pretty penny. Fortunately, many lenders offer zero down home loans to ease borrowers’ down payment woes.
Two types of conventional zero down loans are the 80/20 combo loan known as a “piggyback” mortgage; or simply one loan with additional mortgage insurance.
The 80/20 combo loan (piggyback mortgage)
With a combo loan, the home buyer will actually have two loans. They’ll receive one loan (the first mortgage) at a lower rate for usually 80% of the loan. They’ll also receive a second mortgage at a higher rate of interest for the remaining 20%.
While a piggyback mortgage is usually done as an 80/20 combo like in our example, they are sometimes seen in 75/25 combinations as well.
The 100% loan with mortgage insurance (MI)
If, instead of a piggyback loan, you decide to take 100% of the loan amount in one mortgage, you will either have additional mortgage insurance payments each month or have lender paid MI which results in a higher interest rate.
You may be wondering why you can’t have 100% loan amount without mortgage insurance. Simply put, mortgage insurance is required on all loans where the loan amount versus the value of the home is greater than 80%.
Choosing a zero down home loan
So which option is best—a piggyback mortgage or a single loan? Well, for the most part it depends on market conditions.
When rates are low on 2nd mortgages then piggyback mortgages are often times the better bet. When the opposite is true then one loan with MI may be cheaper.
Until recently, low mortgage rates for the past 5 years have meant a greater amount of piggyback loans. Now that rates are rising, mortgage insurance has come back in style with a vengeance.
Lastly, it’s important to note that a zero down home loan does not mean you will get away without paying closing costs.
The only way you’ll avoid closing costs is if the seller is willing to pay them for you, or your lender is willing to pay them by charging you a higher rate. The term zero down means you are putting zero down on the home, not the transaction as a whole.
Click here to read more about closing costs.
If you’re an Oregon or Washington home buyer interested in zero down financing, please contact me. I’d be happy to discuss loan options with you.
Chelsea Collier is a licensed home mortgage specialist in both Oregon and Washington, as well as a frequent contributing writer for OHM. Please don't hesitate to contact her with any questions you may have about financing (or refinancing) your home.
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