Today more than ever, a generation of homeowners will increase
their debt to equity ratio by more than 30%; what has happened
to increase the debt and decrease the equity? Many of the
mortgage loan products available today do not require a down
payment. Until recently, if you were interested in buying a
home, you were required to put 20% percent down and finance the
balance. Now, prospective homeowners are allowed to borrow up to
125% of the home value! This equates to a negative investment.
How did we get here?
Imagine this scenario: as you graduate and are ready to exit the
college campus, you get married, and now you're ready to move
into that first home. Do you have any money to put down on the
home? No. Are you required to have any money to put down the
home? No. At this point, brake lights should come on at the
mortgage company; today however many mortgage companies are
accelerating not stopping. Never before has there been a time
when a consumer could walk a mortgage company, declare they have
no money put down, and walk away with a huge mortgage.
The interest only loan options and the 125 loan options are
encouraging consumers to spend way beyond their financial
limitations. And there is responsible for the creation and
promotion of these types of loans? The mortgage companies are
the creators and promoters. The increase in the popularity of
the interest only loan, and the fact that it can be tied to so
many different loan products, make it one of the more popular
options in today's market; so popular, that it has grown to a
huge one quarter, or 25 percent, of the entire market.
Are these mortgage companies requiring a smaller down payment,
maybe 5% or 10%? No, they aren't requiring any down payment.
What message does this send to the young consumer? Not a very
good one. You don't need to be a financial analyst in order to
determine that 0% down equates to 0% equity, in most situations.
What does this mean to the young homeowner? If there's no equity
in a home, there's no security in the home; there's no
encouragement to save, there's no encouragement to plan.
If you begin to check with local lenders, and traditional
lending institutions you will find a 20% down payment
requirement is alive and well. Many traditional lending
institutions realize what many mortgage companies seem to
overlook: a homeowner with no investment is a very risky
proposition. Something as important as your home, should be
worthy of personal investment.
So why are there huge gaps between mortgage companies and
traditional lending institutions? Traditional lending
institutions aren't as interested in the profit to be had for
mortgages, as the mortgage companies. Traditional lending
institutions offer a range of products to accommodate the
consumer: banking, commercial loans, and savings provide other
avenues of income for the traditional lender. Mortgage
companies, on the other hand, exist to serve only the mortgage
market. For that reason, mortgage companies are willing to
extend credit without the required traditional down payment. The
mortgage companies have been very creative, and we now have
mortgage products to fit every type of consumer. Many of these
products are very appealing to the young consumer, with very
little savings.
Most of these new mortgage products are designed to appeal to
the young borrower, but to date, they are also appealing to
older consumers. What are some of the mortgage products
available that require zero down? The 1% interest loan, the
interest only loan, the 125 loan, and many of the balloon note
mortgage products require no money down. The standard fixed rate
mortgages and the adjustable rate mortgages still were best if
there is a down payment of some amount, and very few are sold
without a down payment. Many of the standard loan products still
require a 510 or 20% down payment and still offer a better
interest rate. In requiring a down payment, a mortgage lender
accomplishes two things: a cash security against the value of
the home and it requires the borrower to put effort into
acquiring the mortgage.
About the author:
Tony Robinson is a Real Estate Investor, Webmaster and
International Author. Visit http://www.ezy-mortgage.com/ for his
tips on mortgages.
Written by: Tony Robinson
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