Is the wealth building home loan the best mortgage in history? No down payment, all of the closing costs are absorbed by the loan, no extra points or fees, no mortgage insurance AND a very low interest rate. Sound too good to be true? In September 2014, the “Wealth Building Home Loan” was unveiled to a few select areas of Southern California. It was created to assist lower to moderate income prospective home buyers to purchase modestly priced homes and have the ability to build equity faster than any other mortgage currently available.
Bank of America and Citibank are obligated under the 1977 Community Reinvestment Act to provide low to modest income borrowers with affordable home financing. Under this act, they put in subsidies totally $13 billion dollars into this wealth building home loan program. It’s speculated this loan will continue to be available for years to come. Since the loans unveil in September 2014, $5 billion of the fund was used, leaving an estimated $8 billion left in the commitment.
You still need money to put down if you want to build equity. The banks that participate in this loan program offer the option to “buy down” the interest rate. In other words, you would take the money you set aside intended for your down payment and use those funds to buy down the interest rate, therefore, reducing the amount of interest one pays over the life of the loan. The banks are able to offer lower interest rates due to a lower expense to cover credit risks since it’s considered a safer mortgage with fewer defaults. The creators of this loan say no down payment is required and the funds are more beneficial to fund the interest rate buy down. Within 10 months, a Wealth Building Home Loan with no down payment has a lower loan-to-value ratio than the FHA 30 year loan with 5% down. At the 41st month, it drops below 80% on the loan-to-value ratio. In the first three years of this loan approximately 75 percent of monthly mortgage payments pay off principal, and with the 30 year loan, about 65 percent goes to pay interest, thus creating more equity.
Keep in mind, you need to weigh the pros and cons for which route best suites you. The Wealth Builder Home Loan does not add in mortgage insurance. However, it comes with a higher monthly payment because it is a 15 year amortized loan as opposed to the typical 30 year loan most homeowners obtain. For some, who write off their mortgage interest, this loan might not benefit for you if you want to lower your taxable income with interest deduction. This is where doing your research comes into play, because even those who write off mortgage insurance could still benefit from not having it, or hurt themselves with taking it away as a deduction.
If this loan is targeted toward lower income borrowers, how will they afford higher payments? Most people in the middle to lower class can barely get by on the bills they have already accrued. In order for this loan to become widely adopted, to benefit the lower income borrowers, subsidies will be required. Which could then, include government and nonprofits to aide in their ability to obtain a loan.
With the loan comes stipulations. NACA, in Southern California, set a maximum dollar amount one can borrow. For a single family home the maximum allowed is $400,000 and $697,696 for a four family property. Other crucial criteria includes the property being financed must be the borrowers only residence and they must owner occupy the residence.
If one can afford a higher monthly payment, possibly by choosing a house that is smaller and more affordable, in order to obtain a certainty of knowing you have equity in your home, than this loan might be for you. It has the potential to make the homeowner debt free sooner.
This loan benefits banks and can benefit select homeowners, but it can also benefit investors. If this loan gains popularity we will find it easier for homeowners to get out of their properties. They will walk away happy with cash in pocket versus upset they owe more than the house is worth! By paying less interest, we will find less homeowners in over their heads on the amount stilled owned to their lender. Plus, taking over these loans subject to could be a home run for creative investors. Is the wealth building home loan the best mortgage in history? Let’s get your thoughts below: