Final answer:
Interest rates and down payments are significant factors in the affordability and risk of a mortgage. The '20% rule' is standard but sometimes unattainable, leading to alternative financing with potential risks, as seen during the financial crisis with ARMs and declining home values.
Step-by-step explanation:
Understanding Mortgage and Down Payment
When buying a house, there is a common practice known as the '20% rule', which suggests a homebuyer should put down twenty percent of the home's purchase price as a down payment. However, not all homebuyers can save this amount, leading to options like 0-3.5% down payment programs, which often require additional mortgage insurance. Yet, these lower down payments can significantly increase the total mortgage amount over time, adding to the home's cost. The financial crisis highlighted the risks associated with zero-equity home loans, particularly those with adjustable-rate mortgages (ARMs). Lenders and buyers must be cautious, especially since market forces can influence home values and interest rates, potentially leading to tough financial situations for homeowners and lenders alike.
Examples reflecting the impact of down payments and market forces include the scenario where prices stagnate, leading individuals to owe more on their mortgage than their home's value. Moreover, ARMs can have interest rates that start low and escalate substantially, putting strain on homeowners' ability to make payments. It is vital for buyers to understand these terms and their long-term financial implications to make wise purchasing choices that are within their budget and to anticipate changes in loan repayment amounts.