As housing prices skyrocket, mortgage rates climb higher and homeownership becomes far more dream than reality, Zillow has a new offering for Americans struggling to buy property: shrink the up-front costs to a 1% down payment.
Zillow's home loans department is offering this 1% down payment to eligible homebuyers, and the company will contribute 2% when the purchase closes, according to a press release. The program has started in Arizona, with plans to expand to other markets.
The standard recommendation for a down payment is 20% of the purchase price, though there are many other options. Some conventional loans require as little as 3% for a down payment.
While this program may sound appealing to anyone looking to buy their first home, the 1% offer from Zillow comes with trade-offs. Because you're borrowing more, you'll pay substantially more in interest over the course of the loan, and it'll require higher monthly payments to pay it off.
Zillow's program is aimed at prospective buyers who can afford those higher monthly payments but can't save enough for a sizable down payment. But another risk of very low down payments is negative equity, when your outstanding mortgage balance is more than the current value of your home. If home values drop after you buy your home, for example, and you put down only 1%, you could end up underwater on your mortgage.
Before signing up for this low down payment program, make sure you review other paths to homeownership first. There are government-sponsored and private programs available to help with down payments and closing costs, including eight of the best mortgage options to consider as alternatives to Zillow's program for first-time homebuyers.
Read more: Despite 7% Mortgage Rates, There's a Silver Lining for Buyers