The Secret to Housing’s Future – a New Kind of 15-Year Mortgage?

by Peter Thomas Ricci

We often hear about how the nation’s mortgage markets need reform, but the solution could come from the most unexpected source.

One of the most common refrains in the post-bubble housing market has involved lending standards, and that if banks were only more reasonable in how they processed and underwrote loans, then housing would fully recover.

A couple of housing market analysts, though, are arguing that the problem is not so much lending standards, but the actual loans currently available to consumers – and yes, that includes the 30-year FRM, one of the foundations of the current housing market.

What could possibly take the place of the 30-year mortgage? Enter the Wealth Building Home Loan, a mortgage intended to help consumers build more equity in their home in less time.

The 30-Year Mortgage – High-Cost and Long-Term

The chief problem with the 30-year mortgage, argues Edward Pinto of the conservative American Enterprise Institute and Bruce Marks of the nonprofit Neighborhood Assistance Corporation, is its cost. Because the loan is dependent upon home prices rising, homeowners end up devoting a huge percentage of their mortgage payments to interest – not the loan’s principal – in the first years of the loan; so essentially, argues Pinto, the homeowner rents their house from the bank, rather than gaining a greater ownership stake in the property.

The natural response for most people would be to take out a 15-year FRM, but as everyone knows, with less time comes a much higher monthly payment. Thus, Pinto and Marks began discussing how they could offer 15-year mortgages in a more accessible manner, and thus the idea of the Wealth Building Home Loan was hatched.

Wealth Building Home Loan – A Quicker Route to Homeownership

The concept behind the 15-year Wealth Building Home Loan is radically simple – through Marks’ nonprofit (with loans made by Bank of America and Citibank), consumes pay money up front to lower their interest rate in a system called “paying points.” So instead of a downpayment, you apply money to the paying points to bring down your interest rate, effectively driving down the monthly payment and making the 15-year mortgage more affordable.

“It is a game changer because you’re going from a debt model to an ownership model,” Marks said in a story on NPR.

Here’s a comparison:

  • With a traditional 30-year FRM for a $100,000 home, you’d pay $5,000 through the FHA for your downpayment; with a 4 percent interest rate, your monthly payment would be $453, and though your ownership stake would be $14,075 after five years, you’d still owe $85,925 in principal.
  • By contrast, here’s how it is with a Wealth Building Home Loan: the up-front cost is $6,000, but rather than a downpayment, that money purchases “paying points” and reduces the interest rate to 0.125 percent; thus, the monthly payment is $561, but the ownership stake after five years is $33,126, and the principal is $66,874.
  • So in other words, with the Wealth Building Home Loan, the ownership stake is $19,000 more, while the principal is $19,000 less.

In NPR’s report, Pinto admitted that there is still work to be done on making the Wealth Building Home Loan accessible to more consumers, but suffice to say, this is a fresh take on the nation’s mortgage markets, and one we’ll be monitoring closely.

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