Sam thinks there's got to be a better way to finance a home
Sam Schneiderman, broker owner of Great Boston Home Team,looks at home equity and wonders...
The best way to reduce the risk of foreclosures and mortgage related bankruptcies is to reduce the mortgage debt on a home so that there is an “equity safety net” in case values decline, or borrowers need to sell or refinance unexpectedly.
Despite recent problems, lenders and politicians haven’t improved financing to allow borrowers to build equity in their homes as quickly as possible. There has to be a better way. Let’s review the issues and see if we can do better.
The issue of staying in a home long enough to build equity is not just a concern for today’s first-time home buyers. Baby Boomers, retirees, and seniors that sell their homes and move to condos aren’t likely to remain in their new homes long enough to build significant equity either.
ISSUE #1:
Thirty year mortgages don’t build much equity until after about the seventh year. While that worked in a less mobile society, today’s buyers are unlikely to remain in their homes long enough to build much equity by paying down their mortgages.
ISSUE #2:
People lose jobs. Some become ill. Others die. Mortgages based on two incomes become risks when something happens to one of those incomes. Higher home equity levels open the door to refinancing options and also allow borrowers to sell, rather than resort to short sales or foreclosure.
ISSUE #3
PMI protects only lenders and is getting more expensive. (Private Mortgage Insurance is required to be paid by borrowers with less than a twenty percent down payment.) It does NOT go down gradually as home equity builds and the lender’s risk is reduced.
Would you like to see changes that would make home financing safer for borrowers as well as lenders?
Let’s brainstorm about what might be done to build home equity faster.
Sam’s possible solutions:
Since short-term rates are lower than long-term rates, lenders might offer hybrid first mortgages with one monthly payment that amortizes at two different terms and rates. (i.e. a 7 year simple interest loan at three percent and a 30 year loan at around 4.5% in the current market.) After year 7 the money that was previously put toward the short term loan would be paid to reduce the 30 year mortgage debt, thereby building equity faster and reducing the term of the 30 year loan. Maybe the 30 year loan could be an interest only loan until the short term loan was paid off.
Maybe my proposed faster equity building mortgage could be required for borrowers with less than a ten or fifteen percent down payment.
Maybe PMI payments should be reduced as equity is built. The amount of the reduction could then be put toward additional principal payments until there is at least twenty percent equity in the property, which would then occur sooner.
What can you suggest that would improve the way we finance homes in the U.S.?
