Home Buyers did you know there is a company that is offering down payment assistance in certain markets for a 40% equity stake in the eventual sale of the property. If you could not afford the 20% down payment would you consider this as a viable option? This company is willing to give up to 10% of the down payment for mortgages above 625K.
I think this can bring complications later down the line, but if you plan to stay in the property forever I see some benefits with it as well. The company is listed in the article below and they will be sort of living in your basement with a second lien on your property. I will discuss the pros and cons of this type of arraignment later in the post, but let’s think about the emotional rationale first. If and when you finally pay off your mortgage, this company will assume the first lien, and if you ever sell they will take 40% of the proceeds. Wait one second they only invested 10% of the down payment and now they want 40%. That is a big difference to the tune of 30%, and a big capital appreciation for the company. On top of that your house if in a decent neighborhood will appreciate about 3% per year, and they will get all that wonderful increase in market value for doing a one-time investment. Now that you heard this shocking news, does it change your mind?
Home Buying with Down Payment Assistance
Pros:
Help with half of the down payment
Avoid PMI (Private Mortgage Insurance)
Less mortgage interest to payoff over the life of the loan
Increased cash flow because you borrowed less from Mortgage Company
You can always pay back the investing company and remove the lien (But at what % cost)
Invest the other half of the down payment in other investments (If you saved it)
Cons:
Investing company will always have a lien on property (Have rights to it)
Loss of 40% equity Stake in property when sold (Sacrifice Upside Market value)
The property is never fully yours
Only available for Jumbo Mortgages above 625K
AS you can clearly see the pros list outnumbers the cons list. But the reality is the cons future losses might be more devastating to your net worth. The 40% share of the future property value might be 300 thousand dollars in 15 -20 years. I now will ask you this, will you trade with me 62,500 for $300,000? The difference is 237,500 dollars in eventual proceeds of the property assuming the mortgage is completely paid off. I would not take that trade if I were you, and I would rather be patient and save the other 10% if I didn’t have it right now.
Resource: Article
Comment if you are in the process of home buying and you do not mind taking down payment assistance?
Rich Uncle EL
Yeah, I agree. This just seems like a really bad idea. If you can't afford the 20% down, you can't afford the house, period.
bingo to comment above
"The property is never yours" …sound like a big disadvantage to me. When buying a property, for example as a first time buyer…you are looking to buy a home that you can call yours. @Pretried Nick…spot on! If you have not got 20% as a minimum to put down as a deposit….you should consider waiting or decrease your budget so you can afford 20% to put down. When you move into a new property…you will find your self spending more money on many little things such as appliances, furniture etc which all add up at the end of the day.