Mellody's Math: Zero-Percent Financing

Those zero-percent financing offers for your mortgage can seem too good to be true. "Good Morning America" financial contributor Mellody Hobson says that, oftentimes, they are.

Extreme Mortgages

According to the Mortgage Bankers Association, mortgage volume is expected to drop to $2.5 trillion in 2005, down from $2.85 trillion in 2004 (volume peaked in 2003 at $3.8 trillion). Although this year will still be very strong for the mortgage industry, this declining pattern is expected to continue in 2006 and 2007.

In response to this shrinking mortgage market, lenders are even more aggressive with their offers and are turning to guerrilla-like marketing tactics, such as adjustable rate mortgages with "teaser" rates of zero percent and mortgages requiring no down payment. With housing prices up approximately 11 percent nationwide last year and expected to increase another 5 percent this year, according to the National Association of Realtors, these creative financing offers increase the purchasing power of homebuyers. However, as amazing as these deals seem, they come with hidden costs and risks that can be quite high, and ought to be carefully considered.

No Money Down-- Too Good to be True?

While most lenders require a down payment of at least 5 percent, some offer borrowers the opportunity to put 3 percent down, and possibly even zero percent down. On top of that, some mortgage companies include a portion of the closing costs in the loan, bumping the amount of the loan over the value of the house by an additional 3 percent or more. To qualify for a zero percent-down mortgage, most lenders require a stable income and a stellar credit rating -- generally, 700 or higher. Depending on the lender, there also may be income requirements as well as caps on the amount of the loan.