Full-price Financing of Homes Increases

Home buyers opt for loans that cover entire price
RISMedia
Fewer midstate Pennsylvania home buyers are carrying cash to the settlement table.

Instead, more and more people are opting for loans that cover the entire price of their new homes, according to local mortgage brokers.

The popularity of such loans stems from their wider availability and the low savings of many home buyers, brokers said. Buyers, particularly younger ones, also are less concerned about having equity at the start of their mortgages.

"It doesn't seem to be a real worry for them. They'd just rather pay a mortgage than rent," said Nevin Beyer, CEO of Velocity Financial Services Inc., a mortgage broker in New Cumberland.

Justin and Laura Maurice hope someone will be writing rent checks to them someday. The couple, in their mid-20s, used 100% financing to buy a condominium in North Middletown Twp. They plan to live in the two-bedroom condo for a few years and then rent it after they move somewhere else.

They had the money for a down payment, said Justin Maurice, 26. But they preferred to keep it in savings. "It made you feel a little more secure to know that we still had money to do things with," he said.

Sometimes, home buyers opt to put the money destined for a down payment toward furniture, lawn mowers or other items they need, said Jim Bulger, president of the Pennsylvania Association of Mortgage Brokers.

Some homeowners have even refinanced into 100 percent mortgages to pay off credit-card debt, said Bulger, a broker in western Pennsylvania. "I've been seeing a lot of that."

If possible, buyers would be better off keeping their money in savings, said Tami Noll Russo, a certified public accountant and financial planner in Lower Swatara Twp. She is chairwoman of the local financial planning committee for the Pennsylvania Institute of CPAs.

Money in the bank can come in handy during the periodic crises that afflict all homeowners, she said.

"What's going to happen when the hot-water heater breaks or the roof leaks or a power surge knocks out the fridge? It's nice to have the money in savings," she said.

A lack of equity is the main downside of 100 percent financing, said Jennifer Goldbach, president of Lancaster-based HomeSale Mortgage Services, which has four lenders in the Harrisburg area.

Equity is the portion of a home's value that exceeds what is owed on the property.
A borrower with little or no equity who sells a house that has declined in value could end up owing money after the sale, Goldbach said.

The risk is greatest in markets where home prices are falling. That hasn't happened in the midstate, Goldbach said. "We're in more of a plateau. It's not a decline at all," she said.

A 100 percent mortgage typically involves two loans: a 30-year first mortgage covering 80 percent of the price and a shorter-term second mortgage with a higher interest rate for the remaining 20 percent, Goldbach said. For example, a first mortgage with a 6.25 percent interest rate might be paired with a second mortgage at 9.375 percent.

A newer variation allows buyers to split the cost 75 percent and 25 percent, she said.

Lenders also can offer a single mortgage to finance 100 percent of the purchase, but the interest rate is typically higher than a regular first mortgage.

Personally, Goldbach would choose to buy a house the old-fashioned way.

"It's concerning to me as, basically, a banker when you think about the fact that people are going into homes with no equity at all," she said. "My belief, and I'm a conservative person, is always to put some equity into your home."