Zero Rate Mortgages Hitting Main Street

Zero down payment mortgages and similar programs seem to be gaining popularity on the high street of late.

Bank of America announced Aug. 30 that it is launching a pilot program called the Community Affordable Loan Solution, offering mortgages that require no closing costs, down payments or minimum credit scores. People in predominantly Hispanic or black neighborhoods in Charlotte, North Carolina; Dallas; Detroit; Los Angeles; and Miami that meet specific income requirements will have access to the program.

Ticker Security Last change Change %
BAC BANK OF AMERICA CORP. 34.65 +1.08 +3.22%

WHILE MORTGAGE RATES CLIMB, DEMAND FOR LOANS AND REFINANCES DECREASES

In March, TD Bank launched a similar program that includes a $5,000 line of credit that qualified borrowers can use toward closing costs for a home purchase or down payment. Qualified borrowers must meet certain credit and income parameters and reside in a participating market, according to the bank’s press release.

Ticker Security Last change Change %
TD THE TORONTO-DOMINION BANK 65.85 +0.92 +1.42%

The most recent data from the National Association of Realtors found that in 2020 there was a significant racial gap in homeownership. (AP Photo/John Bazemore, File/AP Newsroom)

JPMorgan Chase also expanded its grant program in February 2021 to offer $5,000 in closing costs and down payments to homebuyers purchasing homes in predominantly minority neighborhoods.

Ticker Security Last change Change %
JPM JPMorgan Chase & Co. 118.60 +2.70 +2.33%

The latest data from the National Association of Realtors found that there was a significant racial disparity in homeownership in 2020. White households have an ownership rate of about 72.5%, while homeownership rates for Hispanic and black households are 51.1% and 43.4%, respectively. .

IS THE CURRENT HOUSING MARKET SLOWDOWN LIKE THE 2008 SLOWDOWN?

However, zero-down mortgages have some drawbacks, according to Bankrate.com Chief Financial Analyst Greg McBride.

“The downsides are that homebuyers are very dependent on further appreciation to build significant equity and without that there won’t be enough equity to pay closing costs if plans change and they need to sell in the first few years,” he told FOX Business.

Classic Tudor residential home

“If home prices slow or even decline, a no-down loan could set the buyer up for failure because they won’t have much, if any, equity in the home,” Bankrate.com Chief Financial Analyst Greg McBride told FOX Business. (iStock/iStock)

He also told FOX Business that it’s “the wrong end of the real estate cycle for zero down mortgages.”

Ticker Security Last change Change %
XHB SPDR SERIES TRUST SPDR S&P HOMEBUILDERS ETF 61.00 +0.55 +0.91%

“The risk to borrowers has increased because of the surge in housing prices,” McBride said. “If home prices slow or even decline, a no-down payment loan could be setting the buyer up for failure because they won’t have much, if any, equity in the home.”

Residential mortgage

The number of canceled home sales hit a two-year high in July, as roughly 16 percent of homes that went into contract that month were canceled, according to a Redfin analysis. (David Paul Morris/Bloomberg via Getty Images/Getty Images)

This increases the likelihood of loan default if the borrower wants to leave home, he said.

The housing market has cooled in recent months. The number of canceled home sales hit a two-year high in July, as roughly 16 percent of homes that went into contract that month were canceled, according to a Redfin analysis. Sentiment among builders also hit a record low since May 2020.

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