Consumers Need to Demand Change
You ever get the feeling that certain unpleasant things in life will remain so forever? Or that the deck is stacked against you and you’re destined to be left holding the short end of the stick?
A classic example of this that most can identify with is obtaining a mortgage. They know the experience is less than pleasant and dread the process.
Another that few recognize, or ever consider, is the mistake of placing what is probably their largest investment (home; their nest-egg) into a single basket (local market) – a decision that can place the homeowner at considerable financial risk in the future.
Unfortunately, the current system of financing and owning a home is one that doesn’t work to the advantage of a large percentage of consumers. The good news is that it doesn’t have to remain that way. Change is at hand and consumers now have the ability to reap tremendous benefit when it comes to financing and owning a home.
For consumers with sterling credit and the ability to make a down payment of 20-percent or more, obtaining a mortgage can be a breeze. Then there’s the tens of millions who don’t fit neatly in that box. For them, obtaining a mortgage can be arduous and costly. They are scrutinized and forced to play by the rules set forth by large financial institutions – a “take-it-or-leave-it” type proposition.
Fact is that a large percentage of Americans lack the ability to fork out the requisite 20-percent down payment needed to qualify for a conventional loan with a good interest rate. For the typical family, it can take years to save that kind of money.
Lacking the requisite down-payment, consumers are forced to pay mortgage insurance (PMI) on their home, which for a typical $250k loan will cost an average of $160 per month. Making matters worse, non-conforming borrowers generally pay higher interest rates, which combined with PMI, equates to the homeowner paying thousands more each year for the same home.
No matter how you slice it, this is a penalty to millions of consumers who are simply trying to participate in the American dream. One that exacerbates the issue of affordability, disproportionally so when it comes to minorities, low-income families, and other disadvantaged portions of the overall population.
When it comes to owning a home, a major risk to homeowners is one few have ever considered or even recognize exists. Namely, once they purchase a home, they are now at the mercy of their local real estate market regarding the future value of their investment. All their eggs are in one basket – their local real estate market.
What if there is a natural disaster, a large plant closure, an economic downturn locally, etc.? Or major events, such as the 2008 financial meltdown and the ensuing real estate market crash. Let alone what we face today in the Covid-19 pandemic crisis that early on displaced more than 20 million Americans from the workplace.
Fact is, you can look at any period historically and find that such instances are always occurring, yet you can never know when that will happen. In a very real sense, a homeowner has always been left rolling the dice.
Hence, the inherent problem homeowners have always faced – the inability to diversify their home. Although taught from early on never to place all eggs in a single bucket and instead spread them among many, they’ve never been able to do so when it comes to their home.
For the average person, this presents tremendous financial risk, given that their home is likely their largest, most concentrated asset. It represents the foundational piece of their nest egg. Most count on the equity they build in their home over time to fund their life’s dreams and eventual retirement. Many have found out the hard way those dreams can disappear quickly when the unexpected occurs.
A New Concept – Home Diversification
The concept of home diversification has been years in the planning and is the new frontier in homeownership. In a nutshell, home diversification enables homeowners for the first time ever to diversify what is generally their largest asset.
Utilizing the proven investment concept of diversification to reduce risk, a homeowner is able to spread their eggs from one basket (local market) to many nationwide. This reduces the increased price volatility inherent in local markets and switches their home value to that of a more stable national home price index.
Home diversification provides price stability and considerably reduces their equity and foreclosure risk. Moreover, it helps keep the homeowner in their home even in the midst of severe financial crisis, such as job loss, sickness, an economic turndown, etc.
Reimagining Home Mortgage
Building on the concept of home diversification, we’ve created the next generation of home finance – the Home Diversification Mortgage – to provide tremendous savings (addressing the issue of affordability) and to enable homeowners to protect their largest investment.
The current form of home mortgage forces tens of millions of homeowners to pay monthly PMI. This protects the lender by paying them in the event of a default by the borrower who has purchased a mortgage with less than the conventional 20-percent down payment.
PMI is great for the lender, as it provides credit enhancement that improves the profile of the borrower. This reduces credit risk for the lender, as well as GSEs (e.g.- Fannie Mae and Freddie Mac) who purchase the majority of mortgages in the U.S. Bottom line, a large percentage of consumers simply can’t qualify for a home mortgage without credit enhancement, which costs them on average $160 per month.
A Home Diversification Mortgage offers the borrower a new form of credit enhancement, given that it significantly reduces the consumer’s home equity and foreclosure risk, which in turn virtually eliminates the lender’s credit risk.
As a result, consumers who purchase a Home Diversification Mortgage can take advantage of a low-down/no PMI loan and save on average $160 per month in the process. They’ll also likely benefit from lower interest rates typically offered to conventional borrowers.
Addition benefits to the consumer include:
- Guaranteed diversified national home price appreciation
- A mortgage payment protection feature for events such as job loss, disability, death, divorce, and more
- Peace of mind not available in any other type of mortgage
The home finance industry is packed full of companies seeking a piece of a large pie – the $30-trillion U.S. and $160-trillion global real estate market. Understandably, most in the industry have a vested interest in seeing the status quo continue, regardless of the fact it doesn’t work to the benefit of tens of millions of American consumers.
Ultimately, as new and existing homeowners come to realize they can protect their home through diversification, and potentially save thousands each year in PMI and higher interest rate charges, consumers will begin to demand the only mortgage designed to work in their best interest – the Home Diversification Mortgage.