Ever wonder what all the offers for 100% financing meant?
Many lenders offer 100% financing. This has enabled more people to purchase housing, without having to save or invest in a down payment of 5%, 10%, or 20%.
These types of loans can be
easy to get, but understanding your options can save you money.
A 100% loan allows you to purchase a property with nothing down.
This type of loan is typically for primary residences, but is increasingly offered for the purchase of rental properties as well.
A 100% loan is usually broken down into two loans - one loan for the first 80%, and a second loan for the final 20%. This is also called an 80/20 loan.
The reason this is broken up is that it keeps the size of each loan at less than 80%, so you can avoid paying what is called private mortgage insurance (PMI).
This type of insurance is usually what customers pay if they had a "risky" 100% single loan for a property.
The final 20% loan is usually at a higher interest rate, sometimes as much as double the rate of the first 80% loan.
From a lender's perspective, a 100% loan can be risky because their collateral, the property, can decline in value. This could potentially leave them holding the bag on a bad deal if the borrower walks.
Closing Costs
Often times a lender will also allow the closing costs for a property purchase to be part of the loan.
This is known as "covering closing costs".
It basically works by the seller of a property allowing a portion of the proceeds going to them to be used to cover the buyer's closing costs
These "closing costs" are usually limited to a certain portion of the property value, sometimes up to 6%.
In this way, a person can purchase a property without even having to pay much in the way of closing costs.
These closing costs can be title insurance, escrow fees, etc. Sellers offer this as an incentive to sell their property. Sometimes they can increase the property price by the amount of money they will credit towards closing costs, so that their net income doesn™t go down on the sale.
There are still different payment options for these types of loans, such as getting a regular loan or an interest-only loan.
A 100% loan allows you to get maximum leverage in purchasing a property.
For many people this is an easier way to purchase a property.
Make sure all of your options are put on the table: the first 80% loan may be a regular loan, an interest-only loan, or even give you an option to pay less than interest-only.
About The Author This article is from the
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