100% Refinancing Mortgage Loans
Want to buy a home but think you can't afford it? Many times, the prospect of exorbitant down-payments and other up-front costs prevent us from taking that first step towards home ownership. However, increasingly flexible loan options and nontraditional lenders offer new ways to manage a mortgage. One such option is the 100% mortgage or refinance (also called the “no-down” mortgage/refinance), a type of loan in which buyers pay a larger monthly note in exchange for little to no initial costs.
Different lenders offer different options, and many factors (borrowers' income, credit score, job security, dependents, etc.) are taken into account, but, on average, no-down mortgage lenders will loan as much as five times a single income or four times a joint income. Some mortgage lenders even offer a 100% plus loan (lending more than the value of the property, in other words), to help borrowers pay additional costs associated with home ownership, or even handle other needs such as debt consolidation, car notes, etc. Thus, lenders might offer as much as a 125% loan to borrowers with a high, stable income and positive credit history.
Be aware that there are certain risks involved in this type of loan, most notably the threat of decreased property values. Because a mortgage of this type prevents you from having equity in your home, if the property value declines, you could end up in the position of owing more than the property is worth (a situation called “negative equity”). Property values almost always increase in the long term, so a persistent state of negative equity is unlikely; however, 100% mortgages do make borrowers more vulnerable to the fluctuations of the housing market when they wish to make a change.
It is important to realize that 100% mortgage or refinance loans are not a loophole, or a magic wand. To protect themselves when financing an unusually large portion of a property's worth, lenders will often charge a higher interest rate and/or place more stringent restrictions on loan terms and options. This means that buyers who choose 100% refinance or mortgage loans usually end up paying a slightly higher mortgage loan rate, with more limited options, than those who choose a traditional mortgage with a significant down payment. On the other hand, for those who find that waiting to save enough money for initial fees and down payments (averaging $25,000 these days) results in a seemingly endless cycle of paying rent to others instead of a house note for themselves, 100% loans offer a valuable alternative.
