Are "No Money Down" loans a good idea?

"No money down" loans are risky because you are starting off with no equity in the property. So if the value of the property goes down, you find yourself "upside down" -- that is, owing more than the property is worth. In a cooling real estate markets, the risks are high.

That said, Fannie Mae and Freddie Mac both offer "no money down" loans, so these are certainly not fringe products. In fact, more than 40% of first-time homebuyers did so in 2005, according to the National Association of Realtors.

The catch is that you will usually have to pay higher rates on your loan -- 0.5% higher, by some estimates. You will want to compare the cost of that additional 0.5% with whatever you're saving on mortgage insurance to see if it's the best approach for you.

Some lenders create what amounts to a "no money down" loan by breaking your loan into two pieces: one for 80% of the total you need to borrow, the second for the remaining 20%. The beauty of this approach is that you not only avoid plunking down cash for a down payment, you avoid having to pay mortgage insurance, since mortgage insurance is generally only required when the borrowed amount is more than 80% of the value of the property. Here too, though, one or both pieces of the loan may carry higher interest rates, so make sure that the mortgage insurance savings outweighs any additional interest you have to pay.