Buying a house without savings can cost you a lot more money over time. Let's look at a $300,000 home as an example. Your monthly payment would be $379 more than if you saved up money first. You also need to pay extra fees each month until you own 20% of your home. These fees can be between $125 to $375.
Over 30 years, you end up spending $129,600 more than someone who saved money first. Most of your money goes to the bank as interest – about $382,000 total. If you had saved up first, you would only pay $305,000 in interest.
When you make your monthly payment of $1,896, only $385 helps you own more of your home. The rest goes to the bank. This means it takes longer to truly own your home.
Think about these costs before you decide to buy a home without savings. It might be better to wait and save up money first.
Higher Monthly Payments
When you buy a home without putting money down first, you'll need to pay more each month than someone who saved up money first.
Let's look at what this means:
Think about buying a $300,000 house. If you pay nothing up front, you'll owe $1,896 each month. But if you save $60,000 first, you'd only pay $1,517 each month. That's $379 less every month!
You pay more for two big reasons:
- You're borrowing all of the money instead of just part of it
- You need to buy extra insurance to protect the bank
This extra insurance is called PMI. It adds more money to what you pay each year.
Private Mortgage Insurance Requirements
Getting a home with no money down means you need PMI. This is extra money you must pay each month to protect the lender. PMI costs about $125 to $375 more each month on a $300,000 home until you own 20% of your home.
Most banks want PMI when you put no money down. They need to stay safe if you can't pay your loan.
FHA loans have their own type of PMI called MIP. With FHA loans, you often have to pay MIP for as long as you have the loan.
Only VA loans skip PMI with no money down. But these loans are just for people who served in the military.
Long-Term Interest Costs
Taking out a loan without putting money down first means you'll need to pay more each month.
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Since you didn't pay anything upfront, you have to borrow all the money for your house. This means you'll pay a lot more money in the long run.
The bank will also ask you to pay higher fees since they're taking a bigger risk by letting you borrow all the money at once.
Higher Monthly Payment Totals
When you buy a home without putting money down first, you'll need to pay more each month. This is because you're borrowing all the money for your home, which means bigger monthly bills.
Let's look at what this means with real numbers. Say you want to buy a home that costs $300,000. If you pay nothing up front, you'll need to pay $1,799 each month.
But if you save up and pay $60,000 up front, your monthly bill drops to $1,439.
That means you save $360 every month by paying money up front. Over time, those extra monthly costs add up to $129,600 more that you have to pay.
When you pay this much extra each month, it's harder to save money for other things you want or need.
Additional Years of Interest
When you buy a home without putting money down first, you'll end up paying a lot more money over time. Think of it this way: if you borrow all the money for your home, you have to pay back more in the long run.
Let's look at a simple example. Say you want to buy a $300,000 home. If you don't put any money down first, you'll end up paying about $382,000 extra in interest over 30 years.
But if you pay $60,000 up front (that's 20% of the home price), you'll only pay $305,000 in interest. That means you save $77,000!
Starting with no money down also means you don't own any part of your home yet. You'll have to wait longer to own enough of your home to make changes to your loan or stop paying extra insurance fees.
This means you'll keep paying more money for a longer time.
Limited Equity Building
When you buy a home without saving money first, it takes longer to own more of your home. Think of your home like a piggy bank. At first, most of your monthly payment goes to the bank, not your piggy bank.
Let's say your home costs $300,000. Each month, you pay $1,896. But only $385 of that money goes into your piggy bank. The rest goes to the bank as a fee for letting you borrow money.
Starting with no savings can be risky. If home prices go down, you might owe more than your home is worth.
People who save up money first own their homes faster. Those who save 10-20% of the home price own their homes three to four times quicker.
Market Risk Vulnerability
Getting a home without putting money down can be risky.
If home prices drop, you could end up owing more than your home is worth.
Think of it like this: When you put money down first, it acts like a safety net if prices fall.
Without that safety net, you might've to stay in your home even when prices drop.
Or if you need to sell, you might lose money since you still have to pay back your full loan.
Negative Equity Danger
When home prices drop, you can get stuck owing more money than your house is worth. This is risky if you bought your home without putting money down first.
Think of it like this: Your house might be worth $100,000, but you owe $100,000 to the bank. If prices fall even a little, you'll be in trouble.
| Price Drop | Money You Lose | What You Can Do |
|---|---|---|
| 5% | -$15,000 | Few Choices |
| 10% | -$30,000 | Can't Move |
| 15% | -$45,000 | Deep Trouble |
| 20% | -$60,000 | Big Risk |
| 25% | -$75,000 | Might Lose Home |
Bad times can hit twice as hard. You might lose your job when house prices are falling. Then you'll have to keep paying for a house that's worth less than what you owe, and you won't have many ways to fix it.
Low Leverage Protection
When you put money down on a house, you protect yourself from big swings in home prices. Think of it like a safety net. By paying 20% upfront, you build a wall that keeps you safe if home prices drop.
Back in 2008, when many homes lost value, people who put money down kept their homes more often. In fact, they were almost half as likely to lose their homes as people who didn't put money down.
Let's look at a simple case: If you buy a $300,000 home and pay $60,000 upfront, home prices would need to fall by more than $60,000 before you run into trouble.
This keeps you and your home safe.
Loan Approval Challenges
Getting a home loan with no money down can be tough. You need good credit – at least 620 for VA loans and 640 for USDA loans. Your bills can't be too high compared to what you make each month.
You also need to show you can keep a steady job. Most banks want to see that you've worked for at least two years. They'll look at how much money you have saved up.
For VA loans, you must be in the military or a veteran.
For USDA loans, your home needs to be in the country, and you can't make too much money for your area.
Alternative Down Payment Options
Getting money for a house down payment can be hard. But you have many ways to make it work.
You can ask for help from state programs. These give you free money or loans you may not need to pay back. The help is often 3% to 5% of what the house costs.
Some jobs help you buy a house too. They match the money you save, just like they do with your work savings plan.
If you served in the military, you can get a VA loan. These loans let you buy a house with no money down. FHA loans are good too – you only need to pay 3.5% up front.
Many people get help from their family. In fact, 28 out of 100 first-time home buyers get down payment money from their parents or other family members.
If you work as a teacher, police officer, or help others in your job, look into the Good Neighbor Next Door program. It can cut the cost of your house in half in some areas.
