Low Down Payments Mean No Or Negative Equity When You Buy A Home

Plenty of people are buying homes with 3% down HomePath, 3.5% down FHA or 5% down conventional loan. Often this is simply by choice. Rates are silly low righ now so it make sense to leverage as much as you can, but only if it's by choice.

Just as many people are barely scraping together that 3.5% down-payment to buy a home. If that's you then you probably should not be buying or at least wait until you have saved up some more money. 

You need to know that.

When you buy with a low down payment you are instantly upside down.

It cost money to buy and it cost money to sell. Besides your down-payment buying costs are about 3% and selling cost run around 7%.  In a normal market it takes about 2 years to recoup those cost before you break even.  Some of this can be mitigated by getting a good deal, but that often means putting in some sweat equity.

The reality is that with low-downs your upside down in and upside down market.

Owning a home is more than a mortgage payment.

Owning a home is different from renting. As a home owner you need to take care of the property and pay for all maintenance and repairs. Those cost are regular and they don't stop.  They can easily add 50-100% to what you pay for the mortgage. If you barely had enough money for the down-payment how are you going to handle the added expenses?

You need to have a reserve.

Stuff comes up all the time that need to be taken care of. You should not be buying a home if you don't have a size-able reserve, say 6 months to cover your expenses and excess repairs. They will come up.

Low down payment loans are great. You can leverage in a low interest rate environment. It's another tool, a way to finance properties, but it is not a good choice if you don't have money in the first place, if you have to scrape together the funds just to buy a home. If that's the case you should not be buying.  You should also probably not be buying if you won't be in the home for a minimum of 5 years. Remember in a 'normal market' it will take 2 years to break even and we are not even in a normal market. So it could be longer before you can sell and not have to bring in money to close.