Is Rent Keeping You from Saving for a Down Payment? The Fed Has a Plan

With rent in the Seattle area rising regularly, those who want to buy may find themselves in a difficult situation. They want to live somewhere safe and convenient, but with expensive rent, saving for a down payment simply isn’t in the budget. In recent years, Seattle has seen an incredible boom in real estate, which will continue to push rental rates skyward.

If new families and young professionals pay too much in rent, home ownership may remain just out of reach. Even the most generous mortgage programs, like FHA mortgages, still require at least 1 percent but often 5 percent or more in down payment on a home. The average hovers around 6 percent. For those in expensive cities, like Seattle, saving that money while renting is simply impossible. Thankfully, economists and bankers have noticed this troubling trend.

No Down Payment Mortgages May Help

To promote home ownership, the Federal Reserve has proposed a new form of fixed, 30-year mortgages that require no down payment. Because the monthly payment is fixed, borrowers will know exactly how much to budget. However, the interest rate for the loan may change with the market, leaving those with these mortgages susceptible to increasing rates. A special equity account would offset increased interest rates. If rates were to go down, excess would go directly into that account to establish a buffer or reduce your principal owed.

One concern, however, is that these proposed new mortgages would not allow for refinancing. Borrowers would not be able to change lenders or financial products when rates change in the future. If lending rates continue to climb, there is also concern that those equity accounts could end up drained, leaving the borrower vulnerable to continued rate increases.

Potential to Turn Renters into Owners

Although there are concerns about these new, no down payment mortgages, there is potential in the concept. While lenders haven’t begun offering the product yet, this could change in the near future. When this happens, those with good credit and secure sources of income could find themselves in a position to own a home, even if they can’t save money while renting. A fixed payment also helps these potential homeowners budget, which can be important in a city like Seattle with a higher overall cost of living.

Converting renters into homeowners is good for the local economy. Owner-occupants are more likely to make investments than landlords in their properties. Well-tended yards and modernized exteriors can drive up local property values. Investment in everything from schools to local non-profits may increase when more people feel invested in a community via home ownership.

The Downsides of No Down Payment Programs

Getting a mortgage without a down payment could make home ownership an option for more people, which is a good thing. These people can invest in their homes and communities, which increases the value of their homes over time. More importantly, they develop equity, which often represents a substantial amount of a person’s accumulated assets over a lifetime. When you purchase a home without anything down, it can take longer to build up that equity.

Generally, until you have about 20 percent equity in your home, your lender will require you to carry private mortgage insurance (PMI). This is an additional amount paid to ensure that your lender won’t have financial losses if you default. It’s also important to know that those with lower down payments may have to pay a higher interest rate. This program could eliminate PMI for qualifying borrowers, but whether this happens will depend on the rollout of actual mortgage products that require no down payment.

For now, this program is merely an idea, but the potential is there. Seattle renters could soon find a new pathway to home ownership.

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