SOLVED: Should We Buy a House With No Money Down?

published 31 August 2006

Married last fall, Mollie and Jonathan Gee hope to stay in Birmingham, Ala., after Jon finishes his residency in medicine and pediatrics next July. And they'd like to buy a house as soon as possible. But they're in a quandary: Should they wait to save up a 20% down payment -- which, based on home prices in their area, would require at least $60,000 -- or buy a house sooner with no money down?

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Row 0 - Cell 0	Home Buyer's Survival Kit
Row 1 - Cell 0	How Much Will My Home Payments Be?
Row 2 - Cell 0	Advice for First-Time Buyers
Row 3 - Cell 0	Home Prices Where You Live

Saving for a down payment will lower their costs and give them both security and flexibility, advises Michael Eisenberg, a CPA and financial adviser in Los Angeles, Cal. With a zero-down-payment loan, "you aren't building any equity in the early years," says Eisenberg. "If you're forced to sell, you could lose money."

Equity in your home also gives you a source of cash in an emergency. And the bigger the down payment, the lower your monthly payments, which may mean one of you can afford to stop working, if you wish.

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Buying a house with no money down comes at a price. 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. In the Gees' case, that could mean $3,000 per year because homes in their area sell for $300,000 or more.

Saving for a down payment is a particularly good strategy for the Gees, whose income could triple after Jon finishes his residency. And they're already off to a fast start. For the past several months, they've been living mostly on Jon's salary and saving $1,500 to $2,000 of Mollie's monthly income as a pediatric nurse practitioner. So far they've amassed $25,000.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.