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Can a new 15-year mortgage product help consumers and lenders alike?

It's no secret to those in the industry that the mortgage market has really struggled over the course of the last year or so, and now experts are trying to find creative ways to kick start it once again. That might include lenders trying to find more ways to extend credit to would-be borrowers safely and responsibly, potentially through entirely new mortgage products.

The housing market has long been relatively simple in terms of how mortgages are issued: Buyers tend to get 30-year fixed-rate home loans, while refinancers get 15-year loans, according to a report from the Wall Street Journal. However, some experts have begun to advocate the latter for buyers as well, with the idea being that this kind of offering would allow consumers to build equity far more quickly, and thus significantly reduce the risk of delinquency, foreclosure, and underwater homeownership nationwide.

Digging into the specifics
The math breaks down pretty simply, the report said. Over the first three years of a 30-year FRM, consumers who pay all their bills on time and in full only contribute 32 percent of their payments toward their loan's principal. That is, if they pay $1,000 per month for 36 months, only a little more than $11,500 of the $36,000 they paid goes into their principal, and the rest goes toward interest. But with a proposed new 15-year year mortgage – called the Wealth Build Home Loan – 77 percent (more than $27,700 in this example) of payments go toward that principal. The difference is huge, at more than $16,000, which allows consumers a lot more financial flexibility much earlier in their lives.

There are some concerns about the affordability of a 15-year home loan overall, but experts have an answer for these as well, the report said. For one thing, mortgage rates for 15-year loans tend to be about a full percentage point lower than those for their 30-year counterparts, which dramatically helps ongoing affordability. For another, it seems that if lenders just slightly altered their qualification standards, they might be able to find far more people who could potentially afford the monthly payments.

There are, of course, many things for mortgage lenders to consider when trying to boost business going forward. However, given the way consumer sentiment seems to have turned against home loans somewhat, it might be wise for them to think about all their options, and also try to highlight the fact that affordability remains high even today.

By: Equity National   October 6, 2014     Closing

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