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Down payment assistance short-falls
It seems like everyone is talking about Down Payment Assistance programs right now. With all the hype you'd think these programs we perfect, coming with no downsides 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 thought 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.
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:
A much higher interest rate on the 1 st mortgage
In exchange for the down payment help, you're going to get a much higher rate on your 1st mortgage than you would typically have. The interest rate on your loan is generally 1% higher than what you'd get if you did not use down payment assistance. A full percentage point in interest rate makes a huge difference in your monthly payment and a more significant difference in the total interest you pay over the life of the loan.
So great, you came to closing with no money down, but, you paid for it in your interest rate, and then some. By using down payment assistance, you've now cost yourself ten of thousands of dollars. In reality, you saved yourself nothing.
An additional lien on your home
Most people don't realize that when you use down payment assistance, a recorded lien gets filed against your home. So, you received 15k in 'free money,' and in exchange, you now have a 2nd mortgage on your home for the same amount. If you want to refinance or sell your home down the road, that 2 nd lien must be satisfied. You're not paying for it now, but, you are paying for this money. Explain to me how that's free?
The down payment programs I've investigated agree to forgive the lien as long as you stay in the house for five years. That's great, but since the average person either moves or needs to refinance every three years or so, that's going to be a problem.
Depending on what is going on in the real estate market, you may, or may not have enough equity to satisfy that 2 nd lien when you sell your home. If there is not enough value in your home to pay off the 2 nd lien in full, the shortage is coming out of your pocket. The 2nd lien holder is not going to agree to take less than what they gave you, so you're stuck bringing the difference to the closing table, in cash. Since the majority of us don't have 15k just sitting around, this scenario is going to be problematic.
Let's say you're not selling, but you need to refinance. It doesn't matter why you need to; you need to take care of something and refinancing your home is the easiest way and cheapest way to do so. Well, guess what? The 2nd lien holder is not going to agree to stay in 2nd lien position to allow you to refinance, period. They are not going to let you get cash out for yourself, and not pay them; it's just not going to happen. Unless you're refinancing to pay them in full, you're not doing a refinance. How do you feel about the down payment assistance lien determining what you can and cannot do with your home?
I genuinely despise down payment programs, and I refuse to use them. Personally, even if you have to wait a bit longer to buy, my opinion is that it's best to save the money yourself and stay away from these programs. With just some simple budget adjustments, you can have the down payment saved in 12 months or less. Save the money on your own, and you'll save yourself years of aggravation and tens of thousands of dollars in interest.
If you're thinking about getting a mortgage and have questions, feel free to contact me. I'd be happy to help!
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