NoDown No Kidding

Lenders are also offering to finance 100% of the cost of a new home. This opens the market to many first-time buyers who otherwise would have insufficient savings to cover a down payment.

The no-down mortgage usually consists of a first mortgage, either fixed or adjustable, of up to 80% of the home price (maximum of $500,000), and a second mortgage—usually a variable-rate line of credit—for the remaining 20%. To further entice homebuyers, the no-downs are offered with no private mortgage insurance fees. You might even find a no-down for 103% of the value of the home for amounts up to $325,000.

So what's the catch? These mortgages are generally offered at rates 3% to 4% higher than conventional mortgages. But if you're having a hard time saving up for a down payment, this may be the solution to your

In most cases, the balloon lender has no obligation to help a borrower obtain a loan to pay off the expiring balloon mortgage.

AN ARM AND FIXED-RATE EXAMPLE

Say you're expecting a job-related move within three to six years. You could consider a 30-year, three-year adjustable-rate mortgage (ARM) with a 2% periodic-adjustment cap and a 5% lifetime cap on a $100,000 loan. Assume that you could get this ARM with an initial interest rate three percentage points lower than what you could get with a 30-year fixed-rate loan (points paid at settlement are equal). The following figures show how you would fare with an upward adjustment of two percentage points at the end of year three.

5%, 30-YEAR, THREE-YEAR ARM ($100,000) INTEREST

YEAR RATE PAYMENT BALANCE

5%, 30-YEAR, THREE-YEAR ARM ($100,000) INTEREST

YEAR RATE PAYMENT BALANCE

1

5%

$537

$98,525

2

5

537

96,974

3

5

537

95,344

4

7

656

94,109

5

7

656

6 7 656 91,366

problem. You can buy the home, pay off the down payment within a few years, then refinance the mortgage when more attractive rates are available.

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