Senators Propose Discounted 20-year Mortgage for First-time Buyers
Written By: Joel Palmer, Op-Ed Writer
A group of U.S. Senate Democrats has introduced legislation to create a special 20-year mortgage for certain first-time buyers.
The Low-Income First Time Homebuyers (LIFT) Act would establish a program through Ginnie Mae, in which the U.S. Treasury would subsidize the interest rate and origination fees on a 20-year mortgage.
By subsidizing the loan, the program aims to provide buyers with a 20-year loan for about the same monthly payment as a 30-year mortgage, thus helping them build home equity faster.
The goal of the program is to help first-time buyers who would also be the first generation of homeowners in their families. It is targeted predominately at Americans of color to help them build wealth and to close the racial wealth gap.
To qualify for this program, first-time, first-generation buyers would have incomes equal to or less than 120 percent of their area median income.
The LIFT Act was introduced by Senators Chris Van Hollen (D-Md.), Mark R. Warner (D-Va.), Rev. Raphael Warnock (D-Ga.), and Jon Ossoff (D-Ga.), members of the Senate Committee on Banking, Housing and Urban Affairs, along with Sen. Tim Kaine (D-Va.).
“Homeownership is a key tool for Americans to grow their wealth and build economic stability, but for far too many people, especially people of color, this goal remains out of reach,” said Sen. Van Hollen. “This is a direct result of the systemic racial discrimination that has plagued our nation’s housing policies for generations.”
A fact sheet for the legislation shows how the program might work in today’s market.
It gives an example of a first-time buyer purchasing a $210,000 home with $10,000 down. That would result in a typical FHA 30-year loan on the remaining $200,000 at the current 2.75 percent mortgage rate as well as mortgage insurance. The monthly payment would be about $970 in this scenario.
Under the LIFT program, the lender would instead offer this homebuyer a 1.50 percent, 20-year FHA insured mortgage, which would include a 4 percent up-front FHA fee that would be folded into the loan and no annual FHA premium. The borrower would have a monthly payment of $1,004.
After three years, the 20-year LIFT buyer would have more than $27,000 in built-in equity, compared with $13,700 for the 30-year loan. After 10 years, the difference would be $96,000 in equity for the 20-year loan versus just over $50,000 for the 30-year mortgage.
“Home equity accumulation is one of the best ways to build generational wealth for hardworking families,” said Sen. Reverend Warnock.
According to the fact sheet, Treasury would facilitate the origination of the low rate 20-year LIFT loans by buying Ginnie Mae Mortgage Backed Securities (MBS) collateralized by LIFT mortgages. Treasury would buy these MBS at a premium to their face value in order to compensate lenders for making the LIFT loans.
To avoid taking interest rate risk, Treasury would sell LIFT MBS into the fixed income market. Since the underlying loan rate is lower than market, Treasury would sell the MBS at a discount.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
