100% Financing Conservative? Affirmative.

by Alex Stenback on April 1, 2005

100Despite the fact that Zero Down mortgages have been available since at least 1997, they are still viewed by many (especially among the media and real estate agents) as risky, even irresponsible instruments for financing a home.  We’ve never agreed with that knee-jerk perspective.

Dan Green over at The Mortgage Reports blog, recently laid out the arguments for 100% Financing as a more conservative option for home buyers.  We think he’s right on the money, and have been sharing similar thoughts with clients and other professionals for years. His advice should be of particular interest to those concerned about "buying into a bubble."

Links, a summary of the salient points, and why 100% financing might just be "Bubble Insurance" after the jump [click below]

We’ve summarized the salient points below, but be sure to stop by Dan’s blog and read the whole article.

  • 100% financing puts most of the risk on a third party – the bank.
  • Your home will increase (or decrease) in value by the same figure whether your initial investment is 0% or 20%.
  • By using 100% financing, you are free to invest available cash elsewhere, benefiting from those returns in addition to the increase in the value of your home.

ยทWant to be Conservative? Go 100% [The Mortgage Reports]

We’d also add: Obviously, nobody here is advocating 100% financing for everybody at all times. There are plenty of situations where putting money down makes sense.  But, for those of you concerned about a potential housing bubble, 100% financing may actually be a great hedge [bubble insurance] against a pull back in real estate prices.  Consider the following scenario.

John Doe put down 20% cash that he had earned and saved in order to buy a home.

Sister Jane doe bought a property using 100% financing, and kept her cash invested elsewhere.

Now, if the (theoretical) bubble bursts and housing values get a 20% haircut, who would you rather be?

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