Why Pass Up on No Money Down Investment Property Loans

Posted on: January 9, 2012

Categories: Buy, Other Articles

Author: lbuen

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Turning Down No Money Down Investment Property Loans

No money down investment property loans are a great way to obtain investment properties even if you have not saved up for a down payment yet. Real estate investment opportunities can be fleeting and need swift action or forever lose it, incurring you an opportunity loss. A zero money down mortgage allows an investor to leap on a real estate great deal when it presents itself. Even if you can afford to put down 20 percent of the loan amount, you opt not to because you want to use the money in another investment instead. Despite these perks, a no money down investment property loan also has its downside. If you can afford to make the down payment, cough up and forgo the chance to obtain a 100% mortgage loan. Here’s why:

3 Reasons for Passing up on No Money Down Investment Property Loans

1. Higher overall cost of the investment loan

No money down investment property loans involve taking out primary financing, usually 80 percent of the amount and a piggyback a second mortgage, usually 20 percent, to cover for the down payment. Such a loan structure typically increases the cost of the loan due to the second mortgage. Not only that, this will also increase either the rate on the first mortgage or the total loan fees.

For example, let’s say you would like to secure an investment property loan for a $400,000 property. If you can make the 20 percent down, you can secure a $320,000 fixed rate investment property loan at 5.75 percent, ½ point and other lender fees amounting to $4770.

On the other hand, if you opt for a no money down investment property loan, you may be able to maintain your first mortgage at 5.75 percent, however, expect the rate on your mortgage to significantly increase at, say, 8.15 percent. Total points and other fees would also substantially increase to 1.5 points and $6490, respectively.

2. Higher risk

There is a high default rate among borrowers of 100 percent mortgages. This has been linked to the lack of discipline to save up for a down payment. If they do not have the discipline to save up for a down, then they are also most likely to miss on their payments. These borrowers pay for this high default rate in the form of the expensive piggyback or mortgage insurance. By taking on a no money down investment property loan even if you can afford the down payment, you would also be paying the same steep price.

3. A down payment is also an investment

Many investors say that they would rather invest their $80,000, which is supposed to cover for the down payment, in another higher-yielding investment vehicle. They fail to realize that putting in money for down payment would yield them greater returns. These returns include cheaper upfront costs, slashed interest payments down the road, and reduced loan balances by the time they would be renting out the property allowing them greater cash flow. If you quantify all these, you will realize that a down payment is worth “investing” in. Unless there is an investment vehicle that can truly bring in a very high yield.

Investors who can afford to make a down payment should shun no money down investment property loans to avoid the steep price that are originally set for people who are more likely to default.

 Why Pass Up on No Money Down Investment Property Loans
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