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How to do a 100% financing on a home

 

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Question:

How can I get a 100% financing on a home?

Answer:

Normally a lender will give you a loan of up to 80% of the value of the home at their best terms. The remaining 20% have to be financed with a secondary mortgage to avoid mortgage insurance.

Recently people have opted for another route:
They take a 80% loan as the first mortgage and get a home equity line of credit (HELOC) covering the remaining 20%. They actually get the HELOC before they are even recorded to be on the title. This way they avoid paying the PMI (Private Mortgage Insurance) because the HELOC looks like a 20% down payment and does not need to be insured.

In case you are looking at buying pre-construction, raising home prices (appreciation) can work in favor for you. This is what a friend of mine did:
  • Purchased a pre-construction home for $620,000 in September 2004.
  • Down payment $20,000 (all his savings)
  • HELOC of $100,000
  • 5-year ARM of $500,000

The house is ready to move-in now in August and the house is now worth $750,000. Now he closes escrow and 3 days after the $500,000 loan gets funded, he refinances:
  • gets a loan of $600,000 which happens to be 80% of the new appraised value of $750,000
  • no more HELOC

However, this smart move may or may not work for you because you cannot bet on such good appreciation in 11 months only. If my friend's new home value had gone down he could not have refinanced at all!

He would have been stuck with a $100,000 HELOC that is subject to monthly adjustment (just as the Fed chairman raises the interest rate).

The benefit of financing with a HELOC is that HELOC interest is tax deductible in the United States. PMI (mortgage insurance) premium is not tax deductible (for owner-occupied homes).

The benefits of the traditional secondary mortgage is that you have a fixed payment but less tax deduction. In times of rising interest rates this might be worth something.


It should not surprise you that PMI Group, the largest mortgage insurer in the United States, Australia, New Zealand, and the European Union (http://www.pmigroup.com/) harshly critices the financing with piggy-back HELOCs. It hurts their business but also brings more risk in the housing market, as rising interest rates on those HELOCs may lead to more foreclosures.



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