Kiplinger's: Getting it Mostly Wrong on Down Payment

Kiplinger's: Getting it Mostly Wrong on Down Payment

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

That said, I 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. The media generally gets the "risks" of not putting money down precisely backwards - characterizing low or no money down loans as risky to the homeowner in the extreme. I disagree. Here are Kiplinger's reasons not to buy a home with no money down taken (apart) one at a time:

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: Regardless of 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 someone's advice just because they have a title like CPA or financial adviser. Equity growth has nothing to do with downpayment - your equity doesn't GROW faster with the "fertilizer" of purchased equity at the beginning. Property appreciation is BY FAR the biggest contributor to an equity position. And the ONLY other contributor to "increased equity" is the repayment of principle borrowed. Downpayment money is equity "purchased". You already HAD the money, now you've tied it up. However, understand that down payment money IS useful for securing a better mortgage rate. But it has NOTHING to do with equity.

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. As well, MANY lenders today offer single loans at higher than 80% loan-to-value, WITHOUT mortgage insurance.

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

Really - could Kiplingers logic BE more wrong?

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.

I am not sure how much more clear I 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 me, would you rather risk your own money in a deflating housing market, or the bank's?