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House and Mortgage Are Separate Decisions

Contributed by mm | November 13, 2003 10:46 AM PST

Bankrate's 80-20 Mortgages: Low-Money-Down without PMI discussed some options for people that cannot afford a sizeable down payment. It is nothing new that people with good credit and income can take zero down payment mortgage plans commonly constructed as 80% primary mortgage plus a HELOC.

However, I disagree with the comments on the 80-20 loans at the end of the story, in which the author writes: "The main drawback is a biggie. If the house loses value -- a possibility in overheated markets where these loans might be especially tempting -- the owner ends up owing more than the house is worth. That becomes a problem if the owner needs to sell the house or wants to refinance the loan. In such a case, the owner has to come up with cash to repay the loan in full."

Yes, it's true that if the owner wants to sell when the market is down, he will incur a loss. However, it's not the drawback of of the mortgage, one will still incur a loss even he buys the house in cash. It's just the consequences of a bad house picking.

Yes, it's also true that if one's house value declines and one is in 80-20 loans he is upside-down in the home equity. However, again it's not a problem for the loan itself. Your lender cannot evict you simply because you are upside down. As long as one pays the monthly dues on time, there is no problem at all. No one forces people to sell when house price is heading south.

So, in my simple view of the world, picking the right house and picking the right mortgage are two different things. Especially for those scared of the upside-down scenarios for the 80-20 option, the mortgage itself should be the last thing they need to worry about.

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