It seems like everyone and their uncle in the real estate industry is advertising Down Payment Assistance programs right now. With all the hype you'd think these programs we perfect, coming with no down sides or risks. Are they good programs? That's not for anyone to decide other than YOU and if you're going to make that decision you should at least know the pros and cons of the program.
First let's talk about why people think they need to use this program. Based on my experience it's because first time homebuyers are most often under the impression that 20% down is required to buy a home. This could not be further from the truth. There are many loan programs out there and the most popular ones only require 3%, 3.5% or 5% down. Better yet, this down payment plus any closing costs the Seller isn't already paying can be taken from all kinds of different sources, including 401k's and Gifts from family members. With all of the allowed sources for funds to close you'll likely find that using a down payment program isn't even needed.
Also, you don't have to be a Veteran to buy a home with 0% down. One program allows for no down payment at all in specific areas of the County with no strings attached.
Even with this great information if you do decide to go with down payment assistance it's paramount that you realize that the money you're getting is NOT free. Nothing in life is free and these programs are no exception. You may get 0% interest no monthly payment assistance of 15k and get to come to closing with zero money, but, look at what you're going to get in return for one of the most popular down payment programs:
Higher Interest Rate on 1st Mortgage
In exchange for the down payment help, you're going to get a much higher rate on your 1st mortgage than you would have normally. Let's say your rate on a $242,500 loan amount going with a normal loan program is 5%. Over the first 5 years of the loan, you'll pay about $58,292 in interest on your loan. If you use down payment assistance your rate is going to be much higher, usually .50% to .625% higher. At a rate of 5.625% that same loan costs you $64,330 in interest over that same 5 years. So great, you came to closing with no money down, but, you paid for it in your interest rate, and then some.
Lien on Your Home
When you use down payment assistance, even though there may be no payment due monthly, a lien is still filed against your home. So, you effectively have a 2nd mortgage on your home and this 2nd mortgage needs to be addressed if you want to do something with the home. Most of the down payment programs I've heard of agree to forgive the lien as long as you stay in the home for 5 years. That's great but since the average person either moves or needs to refinance every 3 years or so, that's going to be a problem. That 2nd lien is going to need to be paid and depending what is going on in the real estate market, you may, or may not have enough equity to satisfy it when you sell your home. What does that lead too? The 2nd lien holder is not going to agree to take less than what they gave you, so you're stuck.
Let's say you're not moving, but you need to refinance. It doesn't matter why you need to, you just need to take care of something and refinancing your home is the easiest way and cheapest way to do so. Well guess what? You can't refinance unless your 2nd lien company approves with what you're wanting to do and they are not going to. They are not going to agree to stay in 2nd lien position to allow you to refinance, period. Unless you're refinancing to pay them in full, you're not doing a refinance. So I ask how do you feel about your 2nd lien company having the ability to determine what you can and cannot do with YOUR home?
Me personally, I'm not a fan of these programs for these reasons which is why we do not offer them at all. But are these good programs? That is for you to decide, but please just consider the other options and the cons I've shared with you before making your final decision.
Contact Wendy 7 days a week for more information:
Phone or Text: 321-504-1175