After the housing crisis, two things became relatively scarce: zero-down payment mortgages and adjustable rate mortgages (ARMs). Between skittish banks and new regulations, zero-down mortgages became very hard to secure outside of special programs, and low interest rates made ARMs a less attractive option.
Waterstone Mortgage Corporation is bringing back both of those things in one package with the "Wealth Building Loan," designed to help homeowners build up equity in a shorter timeframe. This pilot loan program has some significant firepower behind it, having been designed by the directors of the American Enterprise Institute International Center on Housing Risk and featuring mortgage insurance and underwriting by the Mortgage Guaranty Insurance Corporation.
The Wealth Building Loan is a twenty-year 7/1 ARM with no down payment. 7/1 means that the initial rate is fixed over the first seven years of the loan, and afterwards there will be a rate adjustment each year. The adjustment will be mandated by the index of the loan (a floating interest rate index such as the London Interbank Office Rate, or LIBOR) plus a fixed margin. ARMs typically have lower rates than fixed-rate loans during the fixed phase of the ARM's interest rate.
Zero-down payment loans require Private Mortgage Insurance (PMI) to compensate lenders for the extra risk, but the terms of the Wealth Building Loan are set up to eliminate PMI as quickly as possible. As compared to a conventional thirty-year mortgage with 3% down payment, the Wealth Building Loan eliminates PMI almost four years earlier. The collective terms allow borrowers to cut down the interest component of their payment and apply more of their mortgage payments to principal, thus building up equity faster.
To qualify for this loan, you must be purchasing your primary residence (no rentals; the home must be owner-occupied) and the home must either be a single-unit residence or condominium. The maximum loan amount available under this program is $424,100, with the exception of some FHFA High-Cost areas (housing markets so expensive that $424,100 may not provide adequate housing options). As with any loan, you will also need good credit to qualify.
What are the downsides of this type of loan? That depends on the terms that you are offered, but here are a few things to consider.
Interest rates are extremely low right now, and an adjustable-rate loan offers an even lower rate compared to a fixed-rate loan, but the twenty-year amortization term will result in larger monthly payments compared to a thirty-year loan. Those larger relative payments contribute to the buildup of your equity. You just have to make sure that the monthly payments are within your budget criteria.
Also, review the adjustment terms very closely. Interest rates are extremely low right now, so it is likely that at the end of the seven-year fixed period the rate index will be considerably higher. Look over the terms with respect to adjustment boundaries (limits, caps, etc.) and the index that is used, and get a feel for the range of payments you are likely to encounter at the seven-year mark. Make sure that those payments are within your capabilities.
If you like the idea of a zero-down payment loan that still allows you to build up the value in your home quickly, check with Waterstone to see if the program is available in your area (currently it can be found in eighteen states). If you find the terms and payment conditions acceptable, it's on to finding your new home!
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