Risks & Tradeoffs Behind 'Free' Down Payment Assistance:
Justin Reynolds
Key Takeaways
- DPA can come with higher mortgage rates
- Silent-second loans and refinance subordination are potential issues
- Recapture tax and occupancy limits apply in many programs
When you see a down payment assistance program (DPA) advertised as 'free,' it can seem like an attractive offer. But before you jump in, there are several hidden strings that could impact your long-term financial plans.
Get a total cost analysis before choosing a DPA program
No-DPA vs. DPA: 5-Year and 10-Year Cost Comparison
| No DPA | With DPA | |
|---|---|---|
| Rate | Base market rate | Often 0.25-0.75% higher |
| Monthly cost (5-year) | Lower | Higher, offset by lower upfront cash needed |
| Monthly cost (10-year) | Lower, gap widens over time | Higher cumulative interest cost |
| Repayment trigger | Not applicable | Often sale, refinance, or end of occupancy period |
| Forgiveness period | Not applicable | Commonly 0-15 years depending on program |
| Refinance flexibility | Full flexibility | May require lender subordination approval |
Talk through your own DPA cost tradeoff
Higher Mortgage Rates
Some DPAs come with a higher mortgage rate to cover the cost of the assistance. For example, if you qualify for a conventional loan at 3%, a DPA might bump that up to 3.5%. Over a 10-year period, this could cost thousands more in interest.
Silent-Second Loans
A silent second mortgage is a type of loan where the lender takes a secondary position behind your first mortgage. If you don't meet certain conditions (like staying in the home for a specific period), they can call in the loan and require repayment.
Refinance Subordination
Subordinating a DPA means pushing it to a secondary position when refinancing. If your new lender doesn't agree, you may not be able to refinance or could face additional fees.
Recapture Tax
Many DPAs include a recapture tax provision that requires you to repay the assistance if you sell your home within a specific time frame (often 9 years). Failure to do so could result in penalties or additional fees.
Occupancy Limits
Some DPAs require you to live in the property for a certain period, usually between one and three years. If you don't meet these requirements, you may have to repay the assistance or face penalties.
Seller Hesitation
Buyers with DPAs can be less attractive to sellers because they worry about the potential for recapture taxes or other obligations. This could make it harder to negotiate a fair price or find a willing seller.
When DPA Helps and When It Backfires
- Long-term Owner: If you plan to stay in your home for many years, a DPA could help offset upfront costs.
- Likely Refinancer: If you expect to refinance within the next few years, a DPA might not be worth the potential long-term costs.
- Buyer who may move or rent: If you're unsure about your long-term plans, a DPA could create more complications than it solves.
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