First-time homebuyers can find it difficult to save for a home’s down payment. Typically, lending institutions require 5-20% before they will approve a mortgage. But there are mortgages that provide 95% financing, meaning the lender supplies the borrower with the entire amount necessary to purchase the home.
In such cases, you do not have any equity in the home until you begin to pay off the mortgage principal, which makes it riskier for borrowers. Also, these types of loans have significantly higher interest rates than loans where a down payment is provided.
And while most properties appreciate over time, should the property you purchase depreciate, you will end up owing even more money, because the market value of the home will not cover the loan amount. Consequently, this type of loan is best suited for people who plan to stay in their home for many years.
