Although rents have declined month-over-month in 60 of the country’s 100 largest cities, rents still increased in 91 of the 100 largest U.S. over the past 12 months according to the Apartment List National Rent Report. In September of last year, rent reached its one of its highest yearly median at $1,018. With renters forking out so much money for rent each month, they are finding themselves struggling to save enough to buy a home.
However, the Federal Reserve made a proposal to help those who are struggling with this seemingly catch-22 situation. According to Bankrate, they proposed a new 30-year, no down payment mortgage that has a fixed mortgage rate. In some of the most expensive renter cities in the U.S., such as San Francisco with an average rent for an apartment at $3,624 as of December of last year, this can be a lifesaver for those who desire to become homeowners. Here is how they suggest such a plan would work.
How Would It Work?
With this new plan, you would be able to buy a home without a down payment and your monthly payment would be established once you take on the mortgage. This monthly amount would be a fixed rate, however, the interest rate would not. The interest rate under this new proposal would be adjustable.
Although this would scare most of us away, the idea is that you would never have to feel the weight of your interest rate going up or down. This would be made possible by creating an equity account that would be filled when the interest rate goes down and emptied when it goes up. This has all been laid out by Fed economists Wayne Passmore and Alexander H. von Hafften in their paper outlining this proposal.
The proposal also suggests that the borrower would end up paying a smaller interest rate. This is supposed to be achieved by removing “a buried cost that homeowners typically pay their lender to cover the risk of defaulting on the loan,” according to “Rent too darn high for you to save for a home? The Fed has a plan.”
Is It Too Good To Be True?
Most of us tend to be skeptical when something sounds too good to be true, and in this case, you would be right. You might be asking—well if it is so good, why isn’t it being offered and advertised already? The reason for this is that lenders are not keen on the proposal due to certain issues it contains.
One of the kickers is that you would not be able to refinance this mortgage. Instead, the money that you save on a dropping interest rate would go into the above-mentioned equity account. However, this doesn’t account for a progressively rising interest rate, which would end up draining the equity account. Once this account goes negative, then the banks would have to make up the difference triggering a loss on the loan.
Although this proposal has a lot of issues, particularly the lower interest rate and other risk related aspects, the goal of the proposal was to at the very least ignite a discussion about affordable housing. As renters continue to pay more for a place that they don’t own, the conversation will only become direr as fewer people have the means to afford a home.