The American dream for nothing down

By Lisa Scontras
Custom Publishing Group

It used to be that conventional loans required 20-percent down — which, on the average median-priced $625,000 home, would mean coming up with $125,000 cash.

But zero-down financing packages — designed to help people with otherwise good credit and good income — are enabling first-time homebuyers who are short on cash to obtain financing and buy a home.

“There are still families out there who don’t know if they’ll ever own their own home,” says Joy Cabildo, vice president and division manager at First Hawaiian Bank. “These no-down-payment products are intended to say ‘Maybe it can happen.’”

Cabildo says there is a real need for 100-percent financing packages — which offer home loans up to $625,500.

“These products are meant to help people get into a home,” she says. “A typical candidate is the young couple who saves and saves for a down payment, and every time they’re almost there, the prices go up and they find themselves short.”

According to Cabildo, there are two main categories of loans which allow the borrower to obtain financing with a limited amount of money from their own pocket. There is the 80/20 loan — which is simply a first mortgage for 80-percent and a second mortgage for the remaining 20 percent. Or you can opt for one loan that provides 100 percent of the purchase price. Each have advantages and disadvantages, but generally speaking, Cabildo recommends going with a single loan.

It boils down to risk, she says.

The main advantage of the 80/20 loan is the savings from not having to pay private mortgage insurance or PMI — which can add up to several hundred dollars to your monthly cost. The disadvantages arise from the fact that while the 80-percent first mortgage is a fixed-rate loan, the 20-percent second mortgage is not.

“Not only will the second mortgage generally be at a higher interest rate than the first, the rate may not be fixed and it will usually not be for a 30-year term,” she advises. “Unless you have a solid plan on how to pay off the second, you may end up having to refinance the entire loan in a couple of years — when rates are likely to be higher. Do you really want to give up your low 80-percent rate to accommodate the 20-percent loan?

“Generally, a fixed-rate mortgages payment offers more stability,” says Cabildo.

It’s even possible to finance some of the closing costs — with 103-percent packages. But Cabildo says there are certain fees that must be paid for with cash.

And if you have enough money saved to pay for the closing costs, it’s a good idea to use it. The loans that are available for up to 105 percent of the purchase price, are a greater risk to the lender, so be prepared to pay a higher interest rate.

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