Traditionally, homeowners choose to carry a 30-year fixed loan over a 15-year loan because the payments are just too high to meet the money required for the shorter term. After all, you’d have to pay off the same amount in half the time, with the one positive being that there is less interest factored in.
There is now a type of loan that allows people to build wealth or equity rapidly within a 15-year period. Plus, there’s no down payment, no closing costs and no mortgage insurance.
The Wealth Building Home Loan (WBHL) was the brainchild of Edward Pinto and Stephen Oliner of the American Enterprise Institute, 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, often called “buying down” the rate.
Since so little of the mortgage payment goes to the interest, within about seven years, borrowers can typically build up almost 50 percent equity.
In order to keep monthly payments down and maintain home-buying power, a conventional 15-year fixed loan is priced around 0.75 percent below the going rate for a 30-year fixed FHA loan.
The loan is also great because there’s 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.
Candidates for the new loan are those classified as low- and moderate income borrowers seeking to buy modestly priced homes. This includes many first-time millennial buyers, who will get more out of buying a smaller home on a 15-year term than a larger house on a 30-year loan.
Requirements for the WBHL are that a borrower cannot own any other existing home, it must be a 1 – 4 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 great for those who don’t benefit greatly from writing off their mortgage interest come tax time.
This article is intended for informational purposes only and should not be construed as professional advice.
