The 30-year mortgage is the foundation of the real estate market largely because it makes housing more affordable. But the truth is, it's a lousy loan for building actual ownership or equity in your home during the first 5 or 7 years. And that caused big trouble when housing crashed.
But now, there's something new that's getting a lot of attention. It's called the Wealth Building Home Loan because it helps people own more of their house more quickly. A pilot project is already up and running to offer this new type of affordable 15-year loan to thousands of homeowners. And perhaps the most amazing thing is, both liberals and conservatives like it.
This Just In: Liberals And Conservatives Agree On Something
In the liberal corner, we have Bruce Marks. And you don't get much more liberal than that. Mark's runs a housing non-profit and calls himself a quote- "non-violent bank terrorist." He's marched onto bank CEO's front lawns with hundreds of homeowners to protest foreclosures. And he likes to go on Fox News and get into yelling matches with conservatives.
But a few months ago, Marks explains he was speaking on a panel at a conference, "I'm saying conservatives don't believe in providing assistance for low and moderate income people."
And speaking at the same conference was Edward Pinto, an economist from the decidedly conservative American Enterprise Institute. Pinto says it was, "a conference on 'the color of wealth' and it was all about the fact that people of color have been slammed in terms of wealth building by what's been going on in the housing market."
Pinto was saying something pretty provocative. That over the past 30 years policies to promote homeownership backfired. He says that's because they became too focused on making home loans affordable — instead of promoting loans that would build more actual ownership in a home. Risking sacrilege amidst housing advocates in his midst, Pinto said that the favorite loan of most housing advocates, the 30-year fixed rate loan, is bad for most people.
"The 30-year loan just doesn't allow you to build wealth unless house prices happen to go up and up and up," he said.
That's because in the first years of a 30-year loan, a huge percentage of your mortgage payment goes to pay interest — not to pay down the principal. So in effect Pinto says you're mostly just paying rent to the bank and the bank really owns the house, "you basically become a renter with a mortgage."
'Going From A Debt Model To An Ownership Model'
So Pinto said instead of pushing 30-year mortgages, we should figure out ways to let more Americans afford 15-year fixed rate mortgages. With that approach you own a much bigger chunk of your house more quickly. And Bruce Marks, after thinking about it, decided Pinto had a really good point. The problem with 15-year loans historically is that the monthly payments are significantly higher.
But the two men decided to try to figure out a way to make 15-year loans affordable for many more people. They had dinner. They kept talking and started working together. And now they've launched a pilot project offering the new 15-year Wealth Building Home Loan. Marks says, "It is a game changer because you're going from a debt model to an ownership model."
Zero Downpayment, Buy-Down Interest Rate To Zero Percent
When you get a mortgage, you can pay money up front to lower the interest rate. It's called paying points. For the pilot loan project, Marks got Bank of America and Citibank to agree to offer an especially good interest rate reduction if you do this. Marks is now offering the loan through his non-profit organization, The Neighborhood Assistance Corporation of America.
Kimberly Wright of Memphis, Tenn., just closed on one of those 15-year loans. And she got an interest rate that's close to zero. It's just 0.125 percent — as in about one-tenth of one percent. She says, "yeah I really thought that it was unbelievable." Wright had to call up her NACA loan consultant she was working with when she saw the final paperwork, to ask her if it was actually real because it sounded too good to be true, "and she was like yes baby, it's true."
Wright works for a company that does embroidery work on uniforms or jackets. She says she makes less than $30,000 a year. She has two teenage kids. And after going through the NACA homebuyer program, she recently bought a house for $82,000.
Paying Yourself To Live In Your House
Instead of making a downpayment, she used about $5,000 to buy points to bring her interest rate down near zero percent. A lower interest rate of course makes the monthly payments lower. And so that allowed her to do this 15-year loan instead of a traditional 30-year loan at a higher interest rate. She says, "I was able to buy my rate down much lower, and then of course I'll be able to pay it off 15 years earlier."
With a near zero percent interest rate, each month nearly all of her $650 payment will go to pay off her principal. So she'll quickly build an ownership stake in her house. Ed Pinto puts it this way, "the money is going literally directly from your left pocket to your right because you're in effect writing a check to yourself."
Pinto acknowledges there's still a lot of work to do to figure out how to make these Wealth Building loans available more widely.
And even then, it may take some convincing for homeowners. Even though these loans are a very good deal in the long run, you pay a little more each month than you would on a 30-year loan, so many people might not be able to look past the monthly payment.
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