Could This Mortgage Product Change Lending?
Two mortgage executives are hoping to overhaul the 15-year mortgage, making it more readily available to low and moderate-income people. They say the changes will help borrowers build equity at a much faster pace than they would with a standard loan.
Edward Pinto, a resident fellow at the American Enterprise Institute, and Bruce Marks, who heads the Neighborhood Assistance Corp. of America, have created a new product called the Wealth Building Home Loan. The new product has generated buzz since being introduced at a mortgage conference in North Carolina 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 requires little or no down payment and has no additional fees. In originating the loans, underwriters pay more attention to a borrowers’ income than the borrowers’ credit score. They will also ensure that borrowers have enough money left over after they make their mortgage payment to cover other monthly expenses, reducing the risk of foreclosure in case a financial setback strikes.
Typically, the monthly payment on a 15-year loan is higher than a 30-year loan, since the loan amortizes faster. In order to make the monthly payments more affordable, however, the Wealth Building Home Loan will have an offering rate that is about three-quarters of a percentage point below the 30-year FHA rate. Borrowers can bring the rate down even further. For example, for every 1 percent of the loan amount the borrower has as a down payment, the interest rate will be lowered by half a percentage point, with the possibility of bringing it to zero.
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.
"This is an opportunity to spend a little more each month but build wealth much more rapidly," Pinto says. "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."
Source: “Loan Gives Low-Income Borrowers a Chance to Build Equity Fast,” The Los Angeles Times (Oct. 5, 2014)