Could 15-year mortgage product change lending?

NEW YORK – Oct. 13, 2014 – Two mortgage executives hope to overhaul the 15-year mortgage, and make it more available to low and moderate-income people. They say it helps borrowers build equity at a much faster pace compared to a standard loan.

Edward Pinto, a resident fellow at the American Enterprise Institute, and Bruce Marks, who heads the Neighborhood Assistance Corp. of America (NACA), have created a new product called the Wealth Building Home Loan, which has generated buzz since its September introduction at a mortgage conference in North Carolina.

The loan will initially be available through NACA's 37 offices, with plans to pilot it at other institutions in the coming months. NACA acts as mortgage originator for Bank of America.

The Wealth Building Home Loan is a 15-year mortgage with a fixed interest rate that requires little or no downpayment and no additional fees. In originating the loans, underwriters pay more attention to a borrower's income than credit score. They ensure that borrowers have enough money left over after the mortgage payment to cover other monthly expenses, reducing the risk of foreclosure in case of financial setbacks.

Typically, the monthly payment on a 15-year loan is higher than a 30-year loan, since the loan amortizes faster. In order to make the monthly payments more affordable, however, the Wealth Building Home Loan offers a rate about three-quarters of a percentage point below the 30-year FHA rate.

Borrowers can bring the rate down even further by increasing the downpayment. For example, for every 1 percent of the loan amount the borrower has as a downpayment, the interest rate will be lowered by half a percentage point, with the possibility of bringing it to zero.

The Los Angeles Times cites an example: A $6,000 downpayment on a $100,000 mortgage at 3 percent would bring the rate to zero. That means all of the borrower's monthly payment would go toward the principal – not interest.

Pinto and Marks say the goal was to create a product that would allow low and moderate-income borrowers to build wealth, and get them away from high-risk loans.

"This is an opportunity to spend a little more each month but build wealth much more rapidly," Pinto says. "But even better, there is only a small probability of going into foreclosure. If house prices should go down, you're covered because you have some equity to fall back on."

Source: "Loan Gives Low-Income Borrowers a Chance to Build Equity Fast," The Los Angeles Times (Oct. 5, 2014)