3 Reasons Not to Buy a House Until You Have a 20% Down Payment- Will there be another real estate crises?

Editors Comments:

America and Australia may repeat the subprime crisis of 2006.

The current conditions in several major countries in the world reminds me of 2006 when I issued a major sell signal for American real estate after I observed that American housewives were having home selling parties instead of Tupperware parties.

Housewives were inviting their friends over to buy a home from their hot estate broker because they bought and then their friends bought as well.

That market was fuelled by the subprime crisis where banks were lending money to anybody that could walk in the door without considering their clients overall financial situation.

 The sub-prime crisis which originated in 2006 caused by subprime lending in the US market. 

The two main reasons, raising interest rates and declining property prices, affected the market, leading to the sub- prime mortgage crisis.

Before it was all over, around 2009, properties in America and most Western countries were selling at 20% to 70% discounts.

Fast-forward to 2020 and 14 years later we are seeing banks lending money to anybody who walks in the door once again.

Countries such as Australia and the United States are creating an artificial real estate market where people are buying properties because of historically low interest rates.

Below is an article about why you should put at least 20% down on a property to avoid ending up in foreclosure in the future.

Bali will avoid another subprime crisis.

One of the things I love about Bali is even when there is a crises prices rarely ever drop.

For example during the Bali bombings property prices just levelled off. Why? Because most Bali properties have no mortgages.

Most Bali Realtors will not to admit what I've been publicizing recently that Bali prices are in a very rare downturn that started in March with the COVID -19 crisis. It destroyed Bali's main source of business, tourism.

Many owners of properties have been holding on for the last 10 months with no jobs and no income. 

They are finally forced to sell to simply survive

So my prediction for 2021 is Western countries such as Australia and the United States may begin a major downturn.

Those who buy Bali properties now at 20% to 50% discounts will be buying at the second-best time to buy  this century. 

The best time was in 2001 when I issued my first ever buy signal here after Suharto resigned. 

Properties since that time have increased hundreds or thousands of percentage points.

My total focus for 2021 will will be to encourage as many buyers as I can to purchase these discounted properties.

If you agree that I may be right you may want to check out our Best Bali Real Estate and in particular Bali distressed properties for sale selling at 20% to 50% below January 2020 presence.

Beware of history repeating it's self. There may be a good chance that America and Australia sometime in 2021- 2022 may repeat the subprime crisis of 2006.

CONTRIBUTOR Christy Bieber The Motley Fool PUBLISHEDDEC 26, 2020 10:00AM EST

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Many lenders make it easy to qualify for a mortgage to purchase a home even with a small down payment. 

But just because you can buy a home without putting much money down doesn't mean it's a good idea. 

In fact, the traditional recommendation is to put 20% down on your home. Following this old rule of thumb and waiting to buy until you've saved a full 20% of your home's price is often the best approach.

So, why shouldn't you jump in sooner and take advantage of lender programs that allow for low or no down payments? Here are three big reasons.

1. You'll have to pay for mortgage insurance

In almost all cases, you'll have to pay for mortgage insurance if you put less than 20% down. This could be private mortgage insurance (PMI) if you get a conventional loan not backed by the government. Or, if you qualify for a loan guaranteed by the Federal Housing Administration (FHA), it could be FHA mortgage insurance. While you don't have to pay for mortgage insurance with VA loans, you will have another up-front funding fee.

Mortgage insurance can be very expensive. The FHA charges both an up-front fee and ongoing premiums, and in some cases you're required to pay mortgage insurance premiums for the entire life of the loan. For conventional mortgages, PMI can sometimes be as high as 2.25%.

Mortgage insurance is designed to protect lenders. If they have to foreclose and your home sells for less than you owe, the insurance guarantees they won't incur outsized losses. You won't be protected against foreclosure by purchasing a mortgage insurance policy. You'll just face hundreds of dollars in extra costs each year for the entire time the insurance is required. This added expenditure makes your mortgage bill bigger without any benefit to you.

2. You may have to pay a higher interest rate

In many cases, lenders charge you a higher interest rate if you make a smaller down payment because they are taking on more risk by lending to you. You will, of course, also be borrowing a larger amount to buy your home without a down payment. This can mean you'll end up paying thousands of dollars in extra interest over the life of your loan -- because of both the higher rate and the larger principal balance.

3. You could easily end up underwater

A small down payment puts you at risk of owing more to your mortgage lender than your home is worth. This is called being underwater. It could happen if property values fall, or if they don't rise enough to pay off both your loan and all the costs associated with the sale of your home.


The last thing you want to do is end up owing more money than your home is worth. If you do that, you're going to face major challenges if you need to sell. You'd still have to pay off your loan in full, even if you couldn't get a high offer on the property to repay your loan and cover all closing costs. That would mean you'd have to bring money to the table to pay your lender back the difference between what you owe and what your home sells for.

For many people, it's impossible to come up with this extra cash. If this happens to you, you might not be able to sell your home when you need to. Or you may end up having to get your lender to agree to a short sale where they accept less than the balance due. This could seriously damage your credit.

If you're underwater, you probably aren't going to be able to refinance your loan either. This makes it harder to reduce your monthly payment or take advantage of low interest rates.

With a 20% down payment, you should have plenty of equity in your home to make the chances of ending up underwater slim. You also won't have to worry about getting stuck with a higher interest rate or PMI due to a low down payment. You'll be in a much better financial position, and buying your home will be less risky. It may seem hard to save up so much to buy a house, but it can be a much better choice than stretching to buy a home you can't really afford with a down payment that's too low.