100 Percent Mortgages

You have probably seen the advertisements offering “No Money Down” mortgages. They show you that you can get a house even if you have nothing in savings. These mortgages, which are usually called 100 Percent mortgages, do work as advertised. With this mortgage structure, you can get a home mortgage without placing any down payment on the property. However, there are some things about this type of mortgage structure that you should know before you sign on the dotted line.

100% Mortgages Versus Traditional Mortgages

When you apply for a traditional mortgage, you will only be getting the mortgage if the loan to value of the mortgage is 75% to 95%. In other words, you will need to put 5% to 25% down on the home in order for the lender to offer you a loan. This protects the lender somewhat, because if you are unable to pay back the loan, they can sell the property quickly at a lower than value price and still regain the money they loaned to you.

With 100% mortgages, you do not put any down payment on the property. This means that the lender has more of a risk if you should default on the loan. If you should fail to pay back what you owe, the lender may not be able to make back all of the money loaned to you.

Costs and Risks of 100% Mortgages

As a result of this increased risk, 100% mortgages carry higher interest rates than traditional mortgages. This means that you will end up paying more for your home in the long run. The loan may be structured so that you are tied in to the loan agreement. The lender may offer you a 100% loan, but in return you sign a loan agreement that carries high fees if you should choose to change lenders. Also, 100% mortgages almost always require the borrower to pay a mortgage indemnity guarantee policy, which adds even more to the cost of the loan.

Of course, you are also at risk if property values should drop. This will create a situation called negative equity. This means that you owe more on the property than it is actually worth. Negative equity is a very dangerous financial situation and should be avoided.

Applying for a 100% mortgage is not necessarily a bad idea, provided you know and accept the risks. Many lenders have reasonable offers for this type of mortgage. Take the time to shop around for the best offering, and choose a 100% mortgage only if you have no money to use as a down payment.

For more mortgage information, why not see our mortgage top 10 tips.