New 15-Year Mortgage May Open Homeownership Door For More Buyers

Oct 3, 2014
Originally published on October 4, 2014 12:56 pm

The 30-year mortgage is the foundation of the real estate market largely because it makes housing more affordable. But the truth is, it's a lousy loan for building actual ownership or equity in your home during the first 5 or 7 years, which caused big trouble when housing crashed.

But there's something new that's getting a lot of attention. It's called the Wealth Building Home Loan because it helps people own more of their house more quickly. A pilot project is already up and running to offer this new type of affordable 15-year loan to thousands of homeowners. And perhaps the most amazing thing is...

Created In A Partnership Between A Liberal And A Conservative

In the liberal corner, we have Bruce Marks, and you don't get much more liberal than that. Marks runs a housing nonprofit and calls himself a quote "nonviolent bank terrorist." He's marched with hundreds of homeowners onto bank CEOs' front lawns to protest foreclosures, and he likes to go on Fox News and get into yelling matches with conservatives.

But a few months ago, Marks was speaking at a conference. So was Edward Pinto, an economist from the decidedly conservative American Enterprise Institute. Pinto says it was, "a conference on 'the color of wealth' and it was all about the fact that people of color have been slammed in terms of wealth building by what's been going on in the housing market."

Marks says he was "saying conservatives don't believe in providing assistance for low- and moderate-income people." Pinto was saying something pretty provocative too: That in the past 30 years, policies to promote homeownership backfired.

Pinto says that's because they became too focused on making home loans affordable, instead of promoting loans that would build more actual ownership in a home. Risking sacrilege amid the conference's housing advocates, Pinto said that the favorite loan of most housing advocates, the 30-year fixed rate loan, is bad for most people.

"The 30-year loan just doesn't allow you to build wealth unless house prices happen to go up and up and up," he said.

That's because in the first years of a 30-year loan, a huge percentage of your mortgage payment goes to pay interest — not to pay down the principal. So in effect Pinto says you're mostly just paying rent to the bank, while the bank really owns the house.

Pinto said that instead of pushing 30-year mortgages, we should figure out ways to let more Americans afford 15-year fixed-rate mortgages. With that approach you own a much bigger chunk of your house more quickly.

'Going From A Debt Model To An Ownership Model'

Bruce Marks, after thinking about it, decided Pinto had a really good point.

The problem with 15-year loans historically is that the monthly payments are significantly higher, but the two men decided to try to figure out a way to make 15-year loans affordable for many more people.

They had dinner. They kept talking and started working together. And now they've launched a pilot project offering the new 15-year Wealth Building Home Loan.

"It is a game changer because you're going from a debt model to an ownership model," Marks says.

When you get a mortgage, you can pay money up front to lower the interest rate, what's called "paying points." For the pilot loan project, Marks got Bank of America and Citibank to agree to offer an especially good interest rate reduction if you do this. Marks is now offering the loan through his nonprofit organization, the Neighborhood Assistance Corporation of America.

Kimberly Wright of Memphis, Tenn., just closed on one of those 15-year loans, with an interest rate that's close to zero. It's just 0.125 percent — as in about one-tenth of one percent.

Wright had to call up her NACA loan consultant she was working with when she saw the final paperwork, to ask her if it was actually real. "Yeah I really thought that it was unbelievable," she says.

Wright, who works for a company that does embroidery work on uniforms or jackets, says she makes less than $30,000 a year and has two teenage kids. But after going through the NACA homebuyer program, she recently bought a house for $82,000.

Paying Yourself To Live In Your House

Instead of making a down payment, she used about $5,000 to buy points and bring her interest rate down near zero percent. That makes the monthly payments lower, which allowed her to do this 15-year loan instead of a traditional 30-year loan at a higher interest rate.

With a near zero percent interest rate, nearly all of her monthly $650 payment will go to pay off her principal, quickly building an ownership stake in her house.

"The money is going literally directly from your left pocket to your right because you're in effect writing a check to yourself," Pinto says.

Pinto acknowledges there's still a lot of work to do to figure out how to make these Wealth Building loans available more widely, and even then, it may take some convincing for homeowners.

Even though these loans are a very good deal in the long run, you pay a little more each month than you would on a 30-year loan, so many people might not be able to look past the higher monthly payment.

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RACHEL MARTIN, HOST:

The affordable 15-year mortgage. It's a proposal that's just starting to get attention. And perhaps the most amazing thing - conservatives and liberals both like this idea. NPR's Chris Arnold explains how this new home loan concept came about - one that would help people own more of their house more quickly.

CHRIS ARNOLD, BYLINE: In the liberal corner, we have Bruce Marks. And you don't get much more liberal than that. Marks runs a housing nonprofit and calls himself, quote, "a nonviolent bank terrorist." He's marched onto bank CEOs' front lawns with hundreds of homeowners to protest foreclosures. And he likes to go on Fox News and get into yelling matches with conservatives.

(SOUNDBITE OF ARCHIVED RECORDING)

BRUCE MARKS: Get real my friend. Talk to these homeowners, they're human beings.

ARNOLD: But a few months ago, Bruce Marks was speaking on a panel.

(SOUNDBITE OF ARCHIVED RECORDING)

MARKS: I'm at a conference, I'm saying that the conservatives don't believe in providing assistance for low and moderate income people.

ARNOLD: And Ed Pinto, an economist from the decidedly conservative American Enterprise Institute, was speaking at the same conference.

ED PINTO: It's a conference called The Color of Wealth, and it was all about the fact that people of color have really been slammed in terms of wealth building by what's been going on in the housing market.

ARNOLD: And Pinto was saying something pretty provocative - that over the past 30 years, policies to promote homeownership backfired. He says they got too focused on making loans affordable instead of promoting loans that would build more actual ownership in a home. The favorite loan of most housing advocates - the 30-year-old fixed rate loan. Risking sacrilege at that conference, Pinto said it's a bad loan for most people.

PINTO: A 30-year loan just doesn't allow you to build wealth unless house prices happen to go up and up and up.

ARNOLD: That's because in the first, say, five or seven years of a 30-year loan, a huge percentage of your mortgage payment goes to pay interest, not to pay down the principal. So, in effect, you're just paying rent to the bank and the bank really owns the house.

PINTO: You basically become a renter with a mortgage.

ARNOLD: So Pinto said instead, we should figure out ways to let more Americans afford 15-year mortgages where you own a much bigger chunk of your house more quickly. And Bruce Marks, after thinking about it, decided that Pinto had a really good point. The two men had dinner, they kept talking, they started working together. And now they've launched a pilot project offering a new kind of 15-year mortgage. They call it the Wealth Building Home Loan. Bruce Marks.

MARKS: It is a game changer 'cause you're going from a debt model to an ownership model.

ARNOLD: Now when you get a mortgage, you can pay money upfront to lower the interest rate. That's called paying points. And for the loan pilot, Marks got Bank of America and Citibank to agree to offer an especially good interest rate reduction if you do this. Marks is offering this new loan through his nonprofit. It's called NACA. Kimberly Wright of Memphis, Tennessee, just closed on one of those 15-year loans and actually the interest rate she got, it's close zero percent.

KIMBERLY WRIGHT: Yeah, I really thought that it was unbelievable. I had to call my mortgage consultant and ask her was it really real? And she was like, yes baby, it's true.

ARNOLD: Wright works for a company that does embroidery work on uniforms and jackets and things like that. She says she makes less than $30,000 a year, has two teenage kids. And after going through the NACA homebuyer program, she's just bought the house for $82,000. Now instead of making a down payment, she used $5,000 up front to get that near zero percent rate. And that's what allowed her to do the 15-year loan instead of the 30-year loan.

WRIGHT: I chose the 15-year plan instead of the 30-year plan because I was able to buy my rate down much lower and then of course, I'll be through paying it off 15 years earlier.

ARNOLD: And with a near zero percent interest rate, nearly all of her $650 monthly payments will be going to pay off her principal. So she'll very quickly build an ownership stake in the house. Ed Pinto.

PINTO: The money is going literally directly from your left pocket to your right because you're in effect writing a check to yourself.

ARNOLD: Pinto acknowledges there is still a lot of work to do to figure how to make these loans available on a wider scale. And even then, it may take some convincing for homeowners, even though these new wealth builder loans are a very good deal in the long run, you pay a little bit more each month than you would on a traditional 30-year fixed-rate loan. So many people just might not go for that. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.