When it comes to mortgages, there might soon be a new kid on the block.
Federal Reserve economists are flirting with an idea of a no-down-payment mortgage, according to Bankrate. This new kind of mortgage would operate as a 30-year, no-down-payment mortgage featuring a fixed monthly payment that is established with your lender.
Down with this whole “no down payment” type of deal? You’re probably not the only one.
Rising rents and crippling student loan debt have seriously made it hard for many young people to scrape together the savings required for a typical 20-percent down payment. The national median rent rose 3.6 percent in 2016 to $841 a month, which is the highest annual spike in years, according to Census data.
A recent survey also revealed that the U.S. currently has a student loan debt load of $1.4 trillion, and among non-homeowners, 83 percent cite student loan debt as the factor delaying them from buying a home. Another report found that even with a degree in petroleum engineering (which, BTW, is the most valuable college degree), it takes new grads typically 2.6 years to save enough for a down payment.
So no, the reason many young people aren’t homeowners quite yet isn’t because they’re brunching and boomeranging too much.
Hold up, is this deal for real?
If this mortgage feels like it might be a miracle, keep reading.
Under the proposal, your interest rate would be adjustable, but you wouldn’t notice any changes in the rate or your total interest payment per month. Instead, an equity account would be used to act as a barrier. So, for example, if the Fed pulls a major plot twist and actually lowers interest rates, any savings you would typically see on your interest rate would go straight into your equity account. Then, that money could be used to pay down the principal faster.
But that’s not what’s happening IRL right now.
Instead, we’re in a rising interest rate environment, so the name of the game at the Fed isn’t exactly “how low can you go.” The Fed has been gradually increasing interest rates, with plans to do so again in the future. Which means the funds in that equity account you have on hand will likely be drained.
“Ideally, you as the borrower won’t be affected by the account having a negative balance because the bank will eat the cost. However, that account—if there are funds in there—would eventually go to paying down the balance of your loan,” Rachel Witkowski, Bankrate’s senior mortgage and housing analyst, says. “So, you’d lose out on paying off your mortgage faster if there’s no money in there.”
Under the proposed new mortgage, you also wouldn’t be able to refinance your loan if interest rates drop. TBD if the proposal will gain traction, but for now, start saving for that down payment STAT. If you’ve got the funds to finally start house hunting, shop current mortgage rates in the table below!
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