Downpayment Myths, As Told By The Mainstream Media

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The Chicago Tribune Real Estate section tells us to think twice before choosing 100 percent financing.  The headline is preying on fear and hides some obvious truths about no downpayment loans. 

Unfortunately, many people only read headlines.

Without reading ahead, which of these two scenarios would you prefer:

1. Crash your best friend's car and owe him $20,000.  You pay up today.
2. Crash your best friend's car and owe him $20,000.  You pay up 5 years from now.

Choosing Option #2 is an intuitive decision, and the right one for most people.

To apply this analogy to homeownership, which of these two scenarios would you prefer:

1. Make a $40,000 downpayment on a home today that loses $40,000 in value.  When you sell, you get nothing.
2. Make a $0 downpayment on a home today that loses $40,000 in value.  When you sell in 5 years, you pay $40,000.

Once again, Option #2 in a no brainer.

And yet, the MSM would say that you're making a mistake because it would be bad to owe money when you sell you home.  That's false.  It's better to have that lost money in hand for the next 5 years where you can actually do something with it instead of watching it fetter away as home prices fall.

There are three very important concepts in mortgage planning that get missed by the MSM and it's important that all homeowners recognize them.

1. Your home will gain/lose value independent of your downpayment
2. The larger the downpayment, the less reserves available for an emergency
3. Money in the bank earns interest, money in your mortgage does not

If your home is going to lose value, it's going to lose value.  There's nothing you can do about it and it doesn't change the fact that you're selling at a loss.  In the end, it's just a case of Pay Me Now, or Pay Me Later. 

But, because of the three points highlighted above, the Pay Me Later route is almost always the winner.  Selling your home for a loss could happen to anybody, but if your initial investment was low, it beats selling a home to break even because your savings are already tied up in there.

As with all personal economics, it's important to be disciplined with your dollars and to talk with a person that knows your financial goals before committing to any mortgage plan or another.  The general statements like those found in the Tribune and other media outlets are designed to sell papers, not financial advice.

And sometimes the statements are patently false.