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Any reason not to go zero down on mortgage?

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  • Any reason not to go zero down on mortgage?

    I am a few years out of training, financially stable. Student loans paid off, about 500k invested assets.

    We just went under contract on a house. I have 10% saved for a down payment. But, after shopping rates, I found a zero down rate which is equal or better than what I'd get at 10% down. It will end up 3.0% or slightly lower, for 30 year fixed.

    Any reason not to go zero down in this scenario? I mean I have the down payment saved already, but can probably find a more efficient use for that money than paying down a long term fixed 3% loan. Am I missing anything?

  • #2
    Compare the overall cost for the mortgages. Sometimes the rate with one will be lower but they have higher upfront fees. Look at the line items on closing costs and total all of the ones that are fees even if you don't have to bring the amount to the closing table and it's "rolled into the loan". Usually with 0 down mortgages the interest rate is slightly higher than you could get on a conventional mortgage, but you may not qualify for conventional rates until you're putting 20% down. I would look at how long it would take you to put 20% down and consider if that is a better option for you. Since you're already under contract on the house, I assume you've already looked at the numbers for conventional vs. doctor mortgages. If you're going with a doctor mortgage, than I would go with 0 down instead of 10% if it doesn't make a difference to your rate.

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    • #3
      If you're going to take the zero down, you'll have to take your 10% down and invest it (which is what I'd do). Otherwise, you're just borrowing money at 3% to spend or keep in a savings account.

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      • #4
        Originally posted by jhwkr542 View Post
        If you're going to take the zero down, you'll have to take your 10% down and invest it (which is what I'd do). Otherwise, you're just borrowing money at 3% to spend or keep in a savings account.
        Yea, that's the idea. A little will be kept to beef up the emergency fund, the rest straight into taxable.

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        • #5
          I don't think there is a problem with 0% down. Personally I would put something down just to start the process, say even 5%. If you ever wanted to sell or calculate net worth, knowing you had some equity in the house is psychologically reassuring.

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          • #6
            Originally posted by Otolith View Post
            I don't think there is a problem with 0% down. Personally I would put something down just to start the process, say even 5%. If you ever wanted to sell or calculate net worth, knowing you had some equity in the house is psychologically reassuring.
            Back in the day there was a time that housing and the market tumbled. Equity in the house can be a financial advantage. Black swans happen.
            This time housing and the market went up.
            Not sure anyone saw that coming.

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            • #7
              0% down has an obvious disadvantage. You are locked into larger fixed expenses. Fixed expenses inherently create downside risk.

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              • #8
                Originally posted by ENT Doc View Post
                0% down has an obvious disadvantage. You are locked into larger fixed expenses. Fixed expenses inherently create downside risk.
                Not to mention the leverage magnifies the risk.

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                • #9
                  With 0 down, do you have to pay an additional PMI until you hit the 20% ?

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                  • #10
                    Originally posted by ENT Doc View Post
                    0% down has an obvious disadvantage. You are locked into larger fixed expenses. Fixed expenses inherently create downside risk.
                    Right, that's the disadvantage. The advantage is a large extra chunk of money compounding in my taxable account for the next 25-30 years.

                    This is a physician mortgage with no PMI.

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                    • #11
                      Originally posted by dayman View Post

                      Right, that's the disadvantage. The advantage is a large extra chunk of money compounding in my taxable account for the next 25-30 years.

                      This is a physician mortgage with no PMI.
                      Yup. And only you can decide your own comfort level with this trade off. This calculus is especially important for those in private gigs taking out loans for buy-ins.

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                      • #12
                        With 0%, if disaster strikes that insurance won’t cover, bank should be there to advocate for their investment or receive the keys.
                        “. . . And the LORD spake, saying “First shalt thou take out the Holy 401k. Then shalt thou save to 20%, no more, no less. 20% shall be the number thou shalt save, and the number of the saving shall be 20%. 25% shalt thou not save, neither save thou 15%, excepting that thou then proceed to 20%. 30% is right out . . .””

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                        • #13
                          The math supports your notion.

                          It depends on your comfort level with debt.

                          I Personally take my risk by having a higher percentage of equities but my house will be paid off early.

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                          • #14
                            As noted by PedsAZ, the interest rate is not the only factor in cost. This is a net present value problem. Set up a spreadsheet, or use the calculator at mortgage professor and enter ALL the cash flows. If the zero-down mortgage comes out best, then great. But you may find that the other costs make it more expensive.

                            I agree that at current mortgage rates one might want to borrow rather than pay cash for the long term. Just have to run the numbers to make sure you know which is preferable in your case.

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                            • #15
                              Originally posted by dayman View Post

                              Right, that's the disadvantage. The advantage is a large extra chunk of money compounding in my taxable account for the next 25-30 years.

                              This is a physician mortgage with no PMI.
                              Not much of a disadvantage really, as pmi is barely more than if you had saved up the money anyway, just choosing a different way to do it. Think similarly of a larger downpayment, you either wait until you have it saved up over time, or do it now with a slightly larger payment, its very much similar.

                              For 0% down the obvious disadvantage is closing/transaction costs if you move any time soon. It doesnt give a lot of wiggle room.

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