My entire life thus far, when it comes to making major financial purchases, has been dictated by the idea of “Can we afford the payments?“. When I bought my first car, the final price I was willing to pay was not as important as what the monthly payment would be. Ditto on my second (and also current) car. Our student loan payment plans were chosen by the affordability of the payments. Even the purchase of my engagement ring involved a discussion of what the payments would be.
So it is no surprise that when my spouse and I decided to buy a house, we had the same idea in mind. We hadn’t meant to be house-hunting, but when our second child was born and we decided we needed to move out of our two bedroom, 800 sq ft apartment before I had a nervous breakdown (our bedroom served as office, nursery and bedroom all in one), we found that renting a three bedroom apartment would cost more than we could reasonably afford in our area, almost 50% more than our 2 bedroom apartment was. We don’t live in a booming rental market, and three bedroom apartments are very few and far between so they are priced at a premium. And finding a house to rent is almost impossible. After some searching, we decided to look at buying a house as a possibility. The problem was, we didn’t have very much (hardly any) money saved for a down payment, and we had always thought we needed a 20% down payment.
Well, if we were smart we would have stuck to the 20% down payment idea as a prudent financial decision. But instead we talked to a mortgage broker and several independent lenders to explore our options and to see what the minimum amount we could use as a down payment and still buy a house.
What we found really surprised us. It seemed no one expected a first time homebuyer to have *any* down payment. We have excellent credit and no money, and apparently here, a credit score is more important than money when it comes to purchasing a home. There were numerous lenders offering us 0% down low fixed rate mortgages. So we figured out what we felt we could afford as far as a payment (which ended up 20% less than we were “approved” for as far as the total loan amount) and started looking for a house. And subsequently, bought a 4 bedroom, 1800 sq ft house with 0% down for a payment that was not much more than our 2 bedroom apartment (taxes and insurance included).
All we really thought about was can we afford the payments. It is an invasive mentality that really does affect most everything we have done in the past.
And now, we live in a 4-bedroom house that I am pretty sure is worth less than we owe on it. Which honestly doesn’t bother me too much, because we are not planning on moving anytime in the near future, but still gives me a little nag of worry if I think too much about it. Yes, we can afford the payments, but that isn’t really the only thing one should consider when making a major purchase. A concept of the entire package is important, and understanding all the ramifications of what we’re getting into. I don’t have a risky or sub-prime mortgage, it is a basic boring 30-year fixed one, but even so, I’ve taken on a level of risk with 0% down financing I never considered in the process of doing it.
Is buying a house with 0% down a good financial decision? Probably not in many cases, and I can’t agree that it was the smartest thing we’ve ever done financially. Can it work out okay? Yes, but you have to be comfortable with the level of risk you are assuming. In the future, I plan to look past the “monthly payment” mentality and really evaluate if my financial decisions match up with my own risk tolerance before I make them. For my walking a financial tightrope will hopefully be a thing of the past.
This post is part of a writing project headed up by Rocket Finance exploring different aspects of the sub-prime crisis, lending practices, and foreclosures, and is my own musings on taking on a risky mortgage. Visit Rocket Finance on Friday for Home Finance: all you need to know about home ownership, a carnival of entries in this project.