Zero down doesn't mean free there are costs associated with this type of mortgage. What it does mean is that you do not need a down payment to purchase a home. In the past 5% to 10% of the purchase price was needed prior to qualifying for a mortgage. This traditional financing still exists but the zero down option provides quicker access to home ownership.

Owning a home is part of the American dream. And, it's proven to be an excellent long-term investment, as well. With mortgage interest rates at historic lows, anyone who is paying rent can probably afford to buy their own home or condominium. Some prospective buyers still think they need a big down payment of 20 or 25 percent. But that's not true anymore. Let's look at some of the ways to buy a home with a low down payment mortgage. VA offers no-down-payment home loans to qualified veterans. FHA requires only a three to 5 percent down payment. Fannie Mae offers its Flex 97 plan with only 3 percent down, but you will need good income and excellent credit. PMI (private mortgage insurance) on home loans with less than 20 percent down will add to your monthly payment.

Because no down payment mortgages are riskier than mortgages secured by down payments, lenders are judicious in qualifying applicants. Estimating only one in four applicants are approved because the underwriting guidelines are more stringent. The lenders scrutinize the appraisal, the income and the credit history. As a result, lenders agree they get more inquiries about zero-down mortgages than applications. Zero down mortgages generally require buyers to pay an interest rate premium of about one-fourth of a percentage point to more than a percentage point over traditional mortgage products. And since private mortgage insurance companies charge higher premiums with lower down payments, 100 percent loans have higher private mortgage insurance costs, too.

There are, however, still significant advantages to making a down payment. First, you're almost certain to get a better rate that will save you thousands over the life of the mortgage. Second, you attain instant equity in your new home, and can borrow against that equity, meaning you really get to use that down payment money twice!