New home loan helps lower-income borrowers build equity quickly

"The key feature of the so-called wealth-building home loan 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, often called "buying down" the rate. For their $400,000 house, the Ongs used what would have been a 4% down payment - $16,000 - to instead buy down their rate to 0.5%."

"In little more than three years of monthly payments, the couple will have more than 20% equity in the home, assuming the property value stays the same. That more than doubles the equity they would build with the same amount down on a 30-year Federal Housing Administration loan at the going rate of 3.25%."

"The loan was unveiled in September by Edward J. Pinto and UCLA researcher Stephen D. Oliner, resident fellows at the conservative-leaning American Enterprise Institute. A key liberal housing advocate, Bruce Marks of the Neighborhood Assistance Corp. of America, or NACA, joined with them to promote the loan."

Grace and Armando Ong, who lost their home during the housing crisis, obtained a new wealth-building home loan designed to help lower-income borrowers build equity quickly while protecting against future property value declines. The loan features a sharply reduced interest rate on a 15-year term, allowing borrowers to use funds that would serve as a down payment to buy down their interest rate instead. For their $400,000 home, the Ongs used $16,000 to reduce their rate to 0.5%, enabling them to build over 20% equity in just three years. This approach generates significantly more equity than traditional 30-year FHA loans while costing only about $150 more monthly. The loan was introduced by researchers from the American Enterprise Institute and supported by housing advocates, targeting low- and moderate-income borrowers purchasing modestly priced homes.

Read at Los Angeles Times