They say that necessity is the mother of invention. I guess that’s why we are seeing some new, and not so new, mortgage programs to help spur the housing markets.
Programs like the resurrected 97% LTV loan from Fannie and Freddie, and, dare I say, talk of the return of the “no income” type loans and this one that offers a zero down option at a 15 year discounted fixed rate (Zero Down).
The idea is to take the money that would be used for the down payment and apply it as discount points to buy down the loan rate. Since the loan is at a 15 year term, although the rate may be a little lower, the monthly payment is higher due to the reduced term. By using the down payment funds to buy down the rate, the intent is to make the monthly payment a little more affordable.
Here’s where the equity building comes into play. At the 15 year term, instead of the standard 30, the homeowner will build their equity much quicker. Sounds like a good program for those with a little cash, good credit and the monthly income to carry the payment. However it’s not a loan program for every buyer as at the 15 year rate, even after discount, the monthly payment may be a little higher than that of a standard 30 year mortgage. Nor is it for every lender, as the program may need a reduced pre-discounted start rate from the lender. Depending on the sale price and down money available for the buy down, this start rate can be reduced to produce a manageable monthly payment for many, and could be a viable loan option for some banks.
This would open more doors to homeownership for those with the income and credit to carry the shorter term loan at a slightly higher payment. Once in, with the equity building quicker, these homeowners will be in a much better position to become move up buyers which will further help to stabilize the housing markets.
There is a downside though. If the consumer defaults in the early stages of the loan the lender is left with a home to foreclose and resell which is mortgaged to the hilt. This could result in a substantial loss when disposing of the property.
It’s important, as it is with all lending, to be prudent and careful when approving buyers for this type loan. Continue to follow the rules for repayment ability and document the loan to ensure the closing of a quality mortgage. One that will perform as expected to benefit the consumer, the lender, and the housing industry as a whole.