Many of the people I’ve grown up with have been buying their first homes at this point. One of my closest friends (and his wife and daughter) is selling his first home and moving onto bigger and better. So yes, I’ve been thinking about it a bit. In that respect, this article caught my attention this morning.
For first-time home buyers, it is incredibly easy to borrow more than the value of a home and make the purchase. The article describes three potentially dangerous methods that have been popular.
* Piggyback Loans. You used to need 20% of the home’s value at the time of purchase. That’s not common anymore. 42% of all first-time home buyers do not put any money down. Without the 20% you have to pay private mortgage insurance or borrow their down payment from a home equity loan. This will only pay off if you can afford to pay more than the minimum each month, and there are many pitfalls of a variable-rate home equity loan.
* Interest-Only Loans. The buyer pays only interest for the first five, 10 or 15 years. If the buyer doesn’t budget for higher payments down the road, he or she could run into trouble. This might be good for someone whose income is definitely going to go up, but that can’t always be a sure thing.
* Minimum Payment Option. Each month, the home owner has several choices. They can either pay the principal and interest as they would on a regular mortgage, they can pay only the interest due, or they can make a smaller “minimum payment” and any outstanding interest gets added to the principle. Borrowers who use the last option often will see the balance of their loan go up over time.
There are some situations where one of the above options might be a good choice, but it’s best to understand the drawbacks.
Published or updated March 8, 2005.