What are the Disadvantages of a 100% Mortgage?

Though it is possible to finance 100% of a home loan, a 100% mortgage or zero-down mortgage may not be the best idea for a number of reasons. There are a few different disadvantages to doing this; first of all, a borrower financing 100% of a home will be considered more of a risk to lenders, and will likely have to pay a much higher interest rate, if the lender will approve a mortgage loan at all. In addition, lenders will often require borrowers to purchase private mortgage insurance (PMI), which will need to be paid until there is at least 20% equity in the home.

A 100% mortgage can be a good option for borrowers who simply cannot afford to put a down payment on a home, but who still want to make a purchase. Of course, it is only a good option if the buyer can actually afford the home; this type of mortgage should never be used to purchase more than one can reasonably afford. It will be necessary for anyone applying for a 100% mortgage to have an excellent credit score and credit history. Generally, anyone with a low credit score or poor history will not even be considered for this type of loan, which would create a sizable risk for a bank.

Because it is such a large risk, a 100% mortgage will almost always require private mortgage insurance (PMI), which is an additional payment on top of the mortgage payment each month. This helps to protect the bank should the borrower find him or herself unable to make the payments. In general, PMI will need to be paid until the buyer is able to achieve 20% equity in the home. This means that the equity in the home, as compared to what is still owed on the home, is at least 20% of its total appraised value. Making improvements to a home can potentially increase its value, which is something to consider as well.

It is important to remember that even with a 100% mortgage, there are other costs that might come up when purchasing a home, such as closing costs. Sometimes these costs can be rolled into the mortgage, but this is something that needs to be discussed and settled in advance, before going to close on the home. In general, if at all possible, it is best to make a down payment, even if it is small. This can help to reduce the interest rate paid on the mortgage, which can make a huge difference over a 15 or 30 year time period. Banks will also generally require that a home financed with a 100% mortgage is the buyer's primary residence.