Two major banks are hoping to overhaul the 15-year mortgage, making it more accessible to low and moderate-income people. The banks suggest these changes will help borrowers build equity at a much faster pace than they would with a standard loan.
In addition, the creators of the Wealth Building Home Loan, which allows home buyers to build equity at a much faster clip than they would with a standard 30-year loan, are planning to bring their ideas to 10 other institutions over the next few weeks.
Edward Pinto, a resident fellow at the American Enterprise Institute, and Bruce Marks, who heads the Neighborhood Assistance Corp. of America, have created this new product which has generated buzz since being introduced at a mortgage conference in early September. The loan will initially be available through NACA’s 37 offices, with plans to pilot it at other institutions in the coming months. (NACA acts as mortgage originator for Bank of America)
The Wealth Building Home Loan is a 15-year mortgage with a fixed interest rate that can be bought down to zero. In addition, little or no down payment is required, there are no additional fees, and underwriters will pay far more attention to your residual income than to your credit score.
Typically, the monthly payment on a 15-year loan is higher than that on a 30-year loan. But the loan amortizes much more quickly, meaning you build wealth — or equity — faster.
To make the payments more affordable, the offering rate will be about three-quarters of a percentage point below the 30-year FHA rate. And the rate can be bought down even further. For every 1% of the loan amount the borrower puts up as a down payment, the interest rate will be lowered by half a percentage point, which is twice the standard!
The Los Angeles Times cites an example of a $6,000 down payment on a $100,000 mortgage at 3 percent, which would bring the rate to zero. That means all of the borrower’s monthly payment would go toward the principal, not interest.
Pinto and Marks say the aim was to create a product that would allow low and moderate-income borrowers to build wealth, and get them away from high-risk loans.
In a sense, the Wealth Building Home Loan is a throwback to the long-forgotten early years of the Federal Housing Administration. For its first 20 years or so, the FHA insured mostly shorter-term, 15- to 25-year mortgages and required 20% down payments, a full review of a borrower’s household budget and rigorous appraisal standards.
But beginning in the late 1950s, U.S. housing policy shifted, and lenders started to rely on ever-looser underwriting standards. The result: Low- and moderate-income borrowers were pushed into overwhelmingly high-risk loans. If something should go wrong in the borrower’s life — job loss, major illness, divorce — there is little equity for s/he to fall back on.
In the first three years of the Wealth Building Home Loan, 77% of the monthly payments go to paying off the loan’s principal, whereas 68% of the payments of a standard 30-year mortgage are interest to the lender.
And after 15 years, you own the home free and clear. And starting in year 16, there is no longer a house payment at all, so you have extra cash flow for life-cycle needs such as your children’s education. With a 30-year loan, on the other hand, you could be making payments well into retirement.
“This is an opportunity to spend a little more each month but build wealth much more rapidly,” says Pinto. “But even better, there is only a small probability of going into foreclosure. If house prices should go down, you’re covered because you have some equity to fall back on.”
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
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