"Zero-down" mortgages are as hot as tamales and that's got some mortgage experts reaching for the seltzer. With a sizzling economy and high-paying jobs on the side, more and more lenders, including Bank of America, upstart RockLoans.com and Morgan Stanley Dean Witter, are serving up zero-downs topped with large monthly mortgage payments.

Nothing-down loans open doors for first-timer, low-income buyers and others who want to hold onto IPO shares, stock options and other investments rather than cash them in for money downs. The no-dough loans also let buyers in a fast appreciating market before prices rise higher.

"I think the 100-percent loans have their place. They have helped consumers get into houses when they otherwise would have been priced out of the market as prices continue to rise," said Forrest Campbell, of Monterey Bay Mortgage in Capitola, CA.

The reasons more lenders are extending the no-money-down hand is, however, questionable.

"They are working now because the lenders have to make a quota of low-income borrowers. They must have high confidence in this real estate market continuing on the uphill side," said a real estate agent from San Jose, CA who asked not to be identified.

What about tomorrow?

What if the economy slips? Let's say you buy a home for nothing down at the height of the market. The economy sours, you lose your job or are forced to accept a low-paying job at the cannery and that large monthly payment looms like a second helping you should have left on the plate. You are trying to keep a roof over your family's head. Cheaper rent is starting to look attractive. With only a little bit invested in your home, what incentive do you have not to just up and chuck the keys to the lender?

Sound familiar?

That's not just a what-if scenario.

A decade ago, real estate markets in Alaska, California, the Northeast and Texas were collapsing, equity was disappearing and defaults zoomed.

Zero-down mortgages alone aren't going to topple the mortgage market, but coupled with the proliferation of low-money down loans and fat 125 percent equity seconds, the trend does have experts concerned that workers with high incomes, but poor saving habits are being rewarded with dessert before they've had dinner.

"What happens if you lose your job and you have to put your home on the market? You've got a six percent commission to pay plus selling costs. You are up to 8 to 10 percent in transaction costs and you don't have any equity. What are you going to do?" asked Bruce Hahn, president of the American Homeowners Foundation.

Before you get to test your financial mettle in economic upheaval, take a look at what the loans offer and what they don't while the market's stomach is still relatively settle.

Ground Zero

Down payment-free loans come in a variety of sizes and shapes from 100-percent-down, fixed-rate financing to zero-down, 80/20s with an adjustable rate on the second. There are Fannie Mae, Freddie Mac and FHA flavors. Private lenders push their own products. The loans can be conforming at $240,000 or less or they can be whopper jumbos up to a half million dollars or more.

Those with the best rates demand high credit scores in the 700s. Others that allow lower scores, can cost a percentage point or more than prevailing rates for conventional money-down mortgages. Still others get you in the door even if you've spilled a bankruptcy all over your credit record, but have since managed to clean up the mess.

"It helps you acquire property. Maybe you pay a premium on the short term, but you can refinance and use future equity to get better financing," says Drew Beveridge, a loan officer at Partners Mortgage in San Jose, CA.

Not so fast.

Try to leave the table too soon, say after just a few years, and you get a pie-in-your face penalty -- as high as three percent of the loan balance.

But before you get that far, you've got higher mortgage payments to swallow.

Buy a $240,000 home with 20 percent down and an 8 percent loan and you'll pay $1,408 a month, in principle and interest. At zero-down, a 9-percent, conforming loan for $240,000 will cost you $1,931 a month, but that's not all.

Private mortgage insurance premiums are higher on a zero-down loan than a 10 percent, 5 percent or even a 3 percent-down loan.

Zeroing in on Wall Street

Another zero-down strategy is the stock-backed mortgage. It gives you the advantage of not having to pay capital gains taxes because you don't sell shares to raise the down payment.

"The stock market has been beat up a little bit and some people don't want to sell stock right now. A down payment is tougher to come by, " said Arnie von Massenhausen, of Advantage Financial in Cupertino, CA.

Stock-backed loans aren't worth it, however, if your stock investment return doesn't equal or exceed the interest rate on the loan.

For collateral, Morgan Stanley's Flex Source requires that you begin with a brokerage account of securities valued at 39 percent or more of the purchase price or appraised value. If your stock goes bad, you must add to the portfolio too keep the collateral value up.

In the end, zeroing down is a lot like a bowl of Tex-Mex chili. It tastes great, but you don't always know what you are getting until you've had time to digest it.

"The inability to save money for a down, unless you have previously owned a home, begs for creativity to help low- to high-income potential homeowners who have an inherent inability to save enough for the down. But what if that inability to save is tied to the abuse of credit, where 100-plus financing is used not only to pay for costs associated with closing the loan, but also to pay for consumer debt?" asks Greg Pennington of Wausau Mortgage in Pleasanton, CA.

"One wonders if the lack of true historical analysis on this particular kind of financing will lead to an over encumbering of credit abusers, enhancing the risks of increased foreclosures," Pennington added.

Like a really bad bowl of chili...on an empty stomach.

For more interest rate news, check out the Realty Times Interest Rate Watch

Published: September 30, 1999

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