The down payment can be one of the biggest obstacles to homeownership. Even in a very modestly priced market, a traditional 20 percent down payment easily amounts to tens of thousands of dollars. Add the various closing costs and a typical home shopper can face a financial goal that is unrealistic at best.

If you’ve got limited cash on hand for a down payment but feel otherwise ready to take on the responsibilities of homeownership, you may only need to find the right program to meet your needs rather than give up on your goal.

Pros and Cons of Making a Down Payment?

Before you jump into a low or zero down mortgage, carefully consider the possible advantages and disadvantages first. If you are able to make even a small down payment, you will probably save money in the long run.

“A down payment offers several advantages, including lower borrowing costs. For one thing, you’ll save on interest charges simply by borrowing less money. The lower the down payment, the higher the risk you are to the lender. Because of this, most lenders offer better rates to borrowers who make more sizeable down payments. Even a 1 percent reduction in your interest rate can net you tens of thousands of dollars in interest savings over the life of the loan.

A higher down payment can eliminate the requirement to purchase private mortgage insurance (PMI), reducing your monthly out-of-pocket costs. It also makes homeownership more affordable by virtue of the simple fact that if you borrow less, your monthly payments are lower.

For investment-conscious borrowers, the decision whether to make a down payment may be based on an evaluation of other investment opportunities. For example, if your options are to either make a large down payment against a 5 percent mortgage or leave the cash in a certificate of deposit account earning 2.5 percent, it may make the most financial sense to apply the funds to the mortgage and net greater savings rather than modest earnings.

Zero Down Payment Mortgage a Good Idea?

A zero down mortgage is a great option for a homebuyer who has limited cash on hand but is otherwise well-qualified to buy a home.“Income and credit standing are much greater indicators of readiness for homeownership than down payment size,”

If you’ve got no plans to sell for at least the first few years, you’re willing and able to take responsibility for the upkeep of the home and you have steady income, a zero down payment mortgage could get you into homeownership years sooner than you could if you had to save for a down payment.

Zero Down Payment Mortgage a Bad Idea?

A zero down mortgage may not be a good option for a borrower who can make a down payment and save money in the long run as a result. Upfront costs and the loan’s interest rate tend to be inversely proportional to the down payment. The more you can put down on a home, the better the terms will be and the less you’ll pay overall.

A zero down payment mortgage is not a good idea in a declining market. If you make no down payment and your home’s value goes down, you will be underwater (you’ll owe more on your home than it is worth in the current market).

You’ll also lose out if you sell in the near future. You need to factor the break-even point (the point at which your equity exceeds both your cost to buy and your cost to sell). This could easily be five years into the loan. If you sell sooner, you’ll lose money.

Finally, a zero down mortgage is not a good financial move for someone who is unable to set aside any money at all on a regular basis. You’ll need some budgetary discipline to be a homeowner, or you could face a serious financial emergency when the home needs maintenance. You won’t be eligible for a home equity loan until you have sufficient equity (often you need 20 percent equity after the loan closes), which will likely be nine to 12 years, depending on your interest rate.