The CFPB recently addressed mortgage financing options in view of the current higher mortgage loan interest rate environment. The CFPB comments on adjustable rate mortgage (ARM) loans, temporary buydowns, home equity lines of credit (HELOCs) and home equity loans, loan assumptions, and alternative financing options. While the CFPB notes the availability and features of the different financing options, it also warns consumers of potential risks.
The CFPB notes that consumers may be “wary of ARMs because of their role in the housing crisis and 2008 recession.” However, the CFPB states that, while ARM loans are not risk-free, “ARMs today look very different than those of the earlier era. Before the 2008 recession, many ARMs had fixed-rate periods of three years or less. Today most ARMs have fixed periods of five, seven, or even 10 years.”
The CFPB also addresses the general qualified mortgage loan requirement under the ability to repay rule that a lender assess the consumer’s ability to repay based on the maximum loan payment that may be required during the five year period from the due date of the first mortgage payment. The CFPB then states that “[a]s a result [of this requirement], today’s ARMs are much less volatile than the ARMs made in the years leading up to the Great Recession, and thus much less likely to lead to payment shock.” The CFPB also advises that “ARMs may provide a good option for certain consumers by offering a lower interest rate as compared to a fixed rate mortgage while providing initial rate stability.”
The CFPB explains a temporary buydown arrangement, noting that the arrangement often provides for a lower payment than would otherwise be required “for the first year or two in exchange for an up-front fee or a higher interest rate later.” For example, in a common 2-1 buydown arrangement, for the first year of a mortgage loan the payment is based on an interest rate that is two percentage points lower than the note rate, and the payment for the second year is based on an interest rate that is one percentage point lower than the note rate. The CFPB advises that “[w]hen considering a temporary buydown, consumers should compare the costs for loans with and without the temporary reduced rate to determine the best product for their needs over time.”
With regard to HELOCs and home equity loans, the CFPB advises that “[n]early a million consumers borrowed against their home equity using home equity loans or lines of credit in Q2 2022. This represents a 37 percent increase from Q2 of the previous year but well below the highs seen in 2005.”
After briefly addressing the features of HELOCs and home equity loans, the CFPB states that “[h]ome equity lending may be a good option for homeowners seeking to leverage the equity they have in their home without having to replace an existing low interest rate mortgage with a higher interest rate cash-out refinance.”
With regard to loan assumptions, the CFPB advises that most single family mortgage loans under the Federal Housing Administration, Department of Veterans Affairs, U.S. Department of Agriculture loan programs are assumable by a consumer buying a home secured by one of the loans. The CFPB explains that because the purchaser takes over the remaining balance on the existing loan, “[t]his would allow a purchaser to take over a fixed rate mortgage with a rate far below the current market, providing large savings on interest and the related payment.”
The CFPB notes that a loan assumption may not always be feasible because of the need of many purchasers to find secondary financing for the remainder of the purchase price not covered by the existing loan balance and down payment. As a result, the CFPB states that “it may be easier for higher-income and higher-wealth borrowers who can make larger cash down payments to take advantage of the assumability of the existing low-interest mortgage.”
Finally, the CFPB addresses alternative financing arrangements, which the CFPB notes include contract-for-deeds or land contracts, rent-to-own arrangements, and equity-sharing arrangements. The CFPB states that “[t]hese unorthodox financing arrangements often have features that can impact consumers’ finances down the road, such as a balloon payment or a requirement to share future proceeds from the sale of the house.” The CFPB also warns that many of these products “lack the protections of traditional mortgages, including the ability to build and access home equity, foreclosure protections, or even basic disclosures that allow for comparison shopping.”
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