Last week, I asked how we might be able to create a better way to finance homes. The premise was that using 30-year mortgages to finance homes that are often sold much sooner didn’t make sense, especially when combined with low down payments.
Many readers felt that the best way to do that was to require a twenty percent down payment from all borrowers. I initially agreed. Then I though about it and wondered how the foreclosure rate on VA loans compared to conventional loans because VA loans require no money down (for those that qualify). On Realtor.com I learned that
“The foreclosure rate in VA loans is a strikingly low 2.46 percent compared to subprime 15.5 percent and even prime loans that are a full ¾ of a percent higher than VA foreclosure loan rate.”
Next, I wondered about FHA loans, which are significant because an estimated 50% of loans are FHA loans in the current environment. On rkaelaw.com I learned that
“The foreclosure rate on FHA loans is one (1%) percent, as opposed to five (5%) percent for non-FHA loans. Among the reasons for this disparity is because the FHA requires the owner to occupy the property and provide full income documentation in order to qualify.”Elsewhere, I saw older statistics that showed a higher FHA foreclosure rate that was still lower than the conventional mortgage foreclosure rate.
Based on VA and FHA loan experience, it looks like tougher lending guidelines are more important than the amount of the down payment.
I still think that it would be hard to argue with the idea that it might be better for both lenders and buyers if home equity built faster in the earlier years, so here is another idea:
Normally, the shorter the term of the mortgage, the lower the interest rate. (i.e. 15 year mortgage rates are typically lower than 30 year rates). If most buyers don’t stay in their homes for more than 15 years, why not give those that want it the option to use a “balloon mortgage” with a 30-year initial term. A 15 or 20-year balloon mortgage would require payment in full or the rate would reset to the market rate in 15 or 20 years. Balloon mortgages were previously available, but I haven’t seen them in a while. Borrowers could still make payments based on the higher 30-year rate, except that money would go toward equity building instead of interest. Equity would build faster and shorten the term of the entire mortgage if it was held for the full term.
Have you ever had experience with a balloon mortgage?
Would you consider using a balloon mortgage if you planned to move on before the balloon payment or rate change was due?
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