Kiplinger’s: Getting it Mostly Wrong on Down Payment

by Alex Stenback on October 2, 2006

Let’s start by saying we like Kiplinger’s Personal Finance, it is a solid personal finance publication which, most of the time, gives sound advice.

That said, we wanted to take just a moment to flush out the silly mythology and flawed logic behind their recent "case study" advising aspiring homeowners to not buy a house with no money down.  [We've covered this before.  The media generally gets the "risks" of not putting money down precisely backwards - characterizing low or no money down loans as risky in the extreme.  We disagree.]  Here’s Kiplinger’s reasons not to buy a home with no money down taken (apart) one at a time – after the jump:

’1. With a zero-down-payment loan, "you aren’t building any equity in the
early years," says [CPA and Financial Advisor Michael Eisenberg.] "If you’re forced to sell, you could lose
money."

Newsflash: Whether or not you have equity if you are forced to sell, you could lose money.  One has nothing to do with the other.  Money lost is money lost.  This is also reason 278 not to follow someones advice just because they have a title like CPA or financial adviser.

2.  Equity in your home also gives you a source of cash in an emergency.

Unless of course that emergency happens to be a job loss, or illness that forces you to stop working. then the only way to get at your equity will be to sell the home.  Equity is not very liquid, and tends to be very hard to get when you need it most.

3. With less than 20% equity in a home, you’ll generally have to buy
private mortgage insurance, which costs up to 1% of the loan amount.

Or, you can use a second mortgage (with tax deductible interest) to avoid mortgage insurance altogether.

4.And the bigger the down payment, the lower your monthly payments,

This is true, but a little misleading.  With rates at current levels, each $1,000 put down will save a homeowner between $6.00 – $7.00 per month.  That means a $10,000 down payment, saves 60 dollars per month.  It takes a very large down payment to impact affordability in a meaningful way.

Really – could Kiplingers logic BE more wrong?

I am not sure how much clear we can be here:  A zero down payment loan (provided of course you can afford the payments in the first place) is NOT "risky" for the borrower/owner.  The only party taking on more risk is the bank.  So tell us, would you rather risk your own money in a deflating housing market, or the banks?
Solved: Should We Buy a House with No Money Down? [kiplingers]

{ 4 comments… read them below or add one }

Duane October 2, 2006 at 4:02 pm

PLUS, in a buyer’s market like today, you may be financing 100% with $0 down, however buying under a fair market value thus instant equity!!

Email me to find your new home!

Todd Carpenter October 2, 2006 at 5:11 pm

Too funny. A house builds and lowers equity regaurdless of the initial downpayment. However, your ROI is far better in a rising market (pretty much always) with a smaller downpayment. I always laugh at stories like this as well. Like the buyer would actually be better off renting over the next 10 years to save up a 20% down payment on a home that will increase in value far more than 20% in the same time period.

Dan Green October 2, 2006 at 8:37 pm

I could go on for hours about why Kiplinger’s is irresponsible about their advice on this one.

But, a lot of journalists for major magazines andnewspapers aren’t homeowners, nor are they immersed in the business on a daily basis like you are, Alex.

In any case, I’ll raise one more counter point.

Downpayments are often taken from a person’s liquid savings, rendering them illiquid after they’ve bought their home.

Life savings and emergency funds are for exactly that — life and emergencies. Once they become a downpayment, those dollars are given to the bank and, when an emergency arrives, the bank will not be likely to give it back.

After all, why would the bank lend money to somebody when their life has gone “off-course”?

And, on Point #1 — duh! to the CPA!

Ed Kohler October 3, 2006 at 3:55 pm

Great post. The difference between cash and equity and the risk/reward associated with is is poorly understood, but I’d expect a financial rag to know the difference.

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