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New Equity-Building Mortgage Works for Some

A new so-called wealth-building home loan is gaining traction among low- and moderate-income borrowers as a tool to build equity fast, reports Los Angeles Times in a recent article

The key feature of the loan, unveiled in September 2014, is a sharply reduced interest rate on a 15-year term.

“Instead of requiring a down payment, banks allow borrowers to use their money to pay interest upfront, often called ‘buying down’ the rate,” Los Angeles Times says.

Borrowers seeking to buy a modestly priced home cannot own any other property and are required to live in the one- to four-unit properties that they purchase.

Grace and Armando Ong, of Southern California, lost their home during the housing crisis, and recently applied for the new loan.

“For their $400,000 house, the Ongs used what would have been a 4% down payment — $16,000 — to instead buy down their rate to 0.5%,” Los Angeles Times says. “In little more than three years of monthly payments, the couple will have more than 20% equity in the home, assuming the property value stays the same.”

The new loan can benefit banks as well as home buyers as well.

“In a [Neighborhood Assistance Corp. of America] NACA program, for example, Bank of America and Citibank chip in subsidies to fulfill their obligations under the 1977 Community Reinvestment Act to provide affordable funding to modest- and low-income borrowers,” Los Angeles Times says. “The banks have put a total of $13 billion into a program to offer discounted mortgage rates, now including 15-year as well as 30-year loans. Citibank offered the Ongs, who were NACA clients, the $400,000 wealth-builder loan at 2.5% and allowed them to buy down the rate.”

Bruce Marks of NACA joins Edward J. Pinto and UCLA researcher Stephen D. Oliner, resident fellows at the conservative-leaning American Enterprise Institute, in support of the new loan.

Loan advocates tell Los Angeles Times they are having discussions with about 20 institutions — lenders, insurers, investment firms, nonprofits — to make the discounted 15-year loans widely available to borrowers of all income levels.

Read the article here.

Written by Cassandra Dowell