Former Treasury Chief Calls for Huge Down Payments
Former Secretary of the Treasury Paul O’Neill has said Congress should drop it’s latest economic stimulus package in favor of changing mortgage rules to the point that no loan is given without a 20 percent down payment. According to MSNBC O’Neill said,
In 2006, he says, 30 percent of mortgages had no down payment and a larger number of those buyers defaulted on their first payment.
“That was a strong enough signal we should have shut down this … flagrant abuse of the principles of home finance,” O’Neill said. “It was bound to crater. It was absolutely bound to come down around our ears, which it has.”
If every mortgage was backed by a 20 percent down payment, O’Neill said, the financial system would be protected long-term, even if some individual investments or businesses failed.
This would definitely protect the U.S. financial system in the long run because NO ONE would be able to get a mortgage to buy a house. If there are no home loans made, there is nothing to lose. My first house in 1992 cost $88,500. Although $7,000 doesn’t sound like a lot (5 percent down payment plus 3 percent for closing costs), our gross income as two working parents was about $33,000 per year at the time. That made finding $7,000 hard to come up with.
But we had scrimped and saved for six years and finally managed to do it. However, if it was $17,700 we would’ve had to pay - along with $2655 for closing costs - it would’ve taken 15 years to get into a home. My point is, there is nothing wrong with asking people to put money down when buying a house, but I believe 5 percent is more reasonable.
My husband and I have never missed a house payment, we’ve never been late on a house payment. Therefore not every person who puts no money (or as little as 5 percent) down is in default - ready for foreclosure.
However, on the flip side, the benefits of coming up with a big downpayment are tremendous. Mike Adams of Somerset 08873 writes,
The risk of putting down too little: If the home falls in value and you sell at a loss, you’ll owe more to the lender than you receive from the buyer. In addition, many mortgages require buyers who put down less than 20 percent to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.
I think there should be a happy medium. I agree that Zero Down programs should accept a large part of the blame for the level of foreclosures we have today. However, if I had to wait 15 years to buy a house, I would’ve gone bonkers. The solid compromise, in my opinion, is to go back to the 5 to 10 percent down payment level.
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Photo from Lifestyle Options 55.
