From 15-year loans to 30-year loans and everything in between, prospective buyers have a lot of options at their fingertips when it comes to choosing the loan that’s best for them. And now, buyers can add one more option to the list: the Wealth Building Home Loan (WBHL). Not only does the WBHL help lower-income borrowers build equity fast, it also protects them against any future crash in values. Plus, there’s no down payment, no closing costs and no mortgage insurance.
The Wealth Building Home Loan is the brainchild of Edward Pinto and Stephen Oliner of the American Enterprise Institute (AEI), who sought a way for borrowers to get the equity benefit of a 15-year fixed mortgage with the affordability that comes from a 30-year loan.
The key feature of the WBHL is a sharply reduced interest rate on a 15-year term. Instead of requiring a down payment, banks allow borrowers to use their money to pay interest upfront, a practice that’s often referred to as “buying down” the rate.
In order to keep monthly payments down and maintain home buying power, the AEI notes that a conventional 15-year fixed loan is priced around 0.75 percent below the going rate for a 30-year fixed FHA loan.
The new WBHL also allows for zero down on financing, with only five percent required in down payment funds repurposed for a permanent 1.25 percent rate buy down. This allows borrowers the chance to pay down their mortgages faster.
It’s also important to consider these numbers: In the first three years with a WBHL, 77 percent of the monthly mortgage payments pay off the principal, creating huge amounts of equity, compared to a 30-year loan, where 68 percent goes toward paying interest. During the same three years, the WBHL (with 0 percent down) amortizes to an 82 percent loan-to-value ratio, while a 30-year fixed rate FHA loan with a 4 percent down payment amortizes to a 91 percent LTV.
Candidates for the new loan are those classified as low- and moderate-income borrowers seeking to buy modestly priced homes. This includes many millennials who will get more out of buying a smaller home on a 15-year term than a larger house on a 30-year loan.
As far as requirements for obtaining a WBHL, borrowers cannot own any other existing home. In addition, the space must be a one-to-four-unit property, and they must live in it themselves after purchase.
While this may not appeal to borrowers looking to lower their taxable income with interest deductions, the loan is a good option for those who don’t benefit greatly from writing off their mortgage interest come tax time.
With the WBHL, you own your home free and clear in 15 years, so it’s definitely something all homebuyers should look into.
To learn more about the Wealth Building Home Loan, contact us today.