Comparing the Pros and Cons of No Money Down Loans
Posted on January 28th, 2010
If you are considering ways to borrow money, you may be presented with no money down loans as an option. No money down loans give you the ability to finance 100% of the money you need without coming up with anything out-of-pocket. However, they are not without some drawbacks as well. Here are a few pros and cons of no money down loans.
Pros
- Save cash- The biggest benefit of going with a no money down loan is getting to keep your cash in hand. When you do not have to come up with any money for the loan, it allows you to hang onto your assets. Having cash in your account can make things a lot easier overall and allow you flexibility with the loan moving forward. Having some savings will make it easier to meet your obligations with the loan.
- Invest the savings- You can take the money that you save on the down payment and invest it into a number of different things. This will allow you to use your down payment money to your advantage instead of handing it to someone else.
Cons
- Higher interest rate- When you get a loan with no money down, the interest rate is going to be higher than normal. When you pay closing costs on the loan, you are typically going to pay some points as well. Points allow you to buy down your interest rate in the process. The bank is going to get their money one way or another. If they do not make you give part of it to them upfront, they will want it throughout the body of the loan instead.
- Higher loan balance- When you do not have to put any money down on a loan, it will raise the balance that you are financing. This puts more money on your debt load and can affect future lending situations. They lump the closing costs of the loan and everything else into the body of the loan. This means that you will be paying for it over time instead of at the beginning.
- Higher monthly payment- When you do not pay any money down on a loan, this also means that you are going to be paying more each month as a result. When you are borrowing more money at a higher interest rate, this is going to make the monthly payment higher than what it could be otherwise.
The Verdict
Deciding whether or not you should get a no money down loan should come down to personal preferences. If you do not have the money to invest, then it may be your only option. If you have some money to put down, then it could benefit you to use it and save yourself some money over the life of the loan.
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