House Purchase: Why Should You Avoid a Zero-down Mortgage at All Costs
The down payment is usually the most significant roadblock getting in the way of Filipinos to home ownership. Many of us spend years or even more than a decade to save for enough money to cover a portion of our prospective property’s price along with other upfront costs. Honestly, it can be a painfully long process, which is why some are tempted to jump at the chance to avoid it.
However, you should decline the option to buy a house and lot in the Cavite area or any other neighboring province of Manila. Nobody likes the grueling experience of saving for a down payment, but it is a necessary part of the journey. If you take a shortcut, below are the consequences:
Taking out a zero-down mortgage, a loan with a 0% down payment requirement, means the lender will foot the bill for the entire house purchase. In other words, you will borrow the full price of the property, which in turn will increase your total loan amount.
The more money you borrow, the higher the interest you need to pay over the life of your mortgage. So even if you manage to get a relatively low interest rate, the money that will be added to the principal might be higher than what you will pay if you get a higher interest rate but borrow less.
Since the lender will have to absorb more risk to loan you the funds to buy your prospective house, the more interest will likely be charged to you to make up for it.
High Monthly Amortization
Considering that both the principal and interest are high in zero-down home loans, your monthly repayments will be bigger, too. Increasing the term of your mortgage can help, but it will only raise your total cost of borrowing because the principal will be payable in more months. The more time you need to pay the principal, the higher the interest you need to pay because a longer term is inherently risky to a lender.
Home equity is what is left when you deduct the appraised value of your property from what you owe on it. If you do not put down any money up front, then you will have zero equity at the beginning.
Although home equity will increase as your principal goes down and when the land on which the house sits appreciates, it can also become negative. If the real estate market crashes, property prices can suddenly drop, which is bad news if you wish to sell your house in the future.
Housing Market Collapse
Speaking of market crashes, zero-down mortgages can result in property speculation. The Filipinos who actually can’t afford to buy a house can become qualified for a home loan. If enough people do this, a housing bubble can form, pop, sweep the equity built on properties away, and make the wealth of many Filipino families vanish. Even if such loans become fashionable, do not jump on the bandwagon and be part of the problem.Paying a down payment makes homeownership less attainable, but it serves a restrictive purpose. After all, it is better to know you can’t afford to buy a property now than learn about it later when you already place a lot of money on it.