Zillow offers 1% down payment (what could possibly go wrong?)

From CBS

Real estate marketplace Zillow has launched a new program to help people who want to buy homes but are being squeezed out of the market by a surge in interest rates.

Zillow Home Loans is offering mortgages with a 1% down payment option for eligible homebuyers looking to own property in Arizona, and will contribute an additional 2% at closing, the company said Thursday. It also plans to expand the program to other markets. . . .

On Wednesday, mortgage rates surged to their highest level since 2000. The average rate on a conventional 30-year fixed-rate mortgage jumped to 7.31% last week, up from 7.16% the previous week, according to The Mortgage Bankers Association (MBA).

From Bloomberg via YahooNews

Zillow Group Inc. is offering mortgages with just a 1% down payment as it tries to attract house hunters facing the most-unaffordable market in almost four decades. . . .

The 1% down payment program is even lower than Freddie Mac’s best of 3%, with Zillow offering to pay 2% of the down payment at closing, according to a statement Thursday.

https://finance.yahoo.com/news/zillow-offers-1-down-payment-194600522.html

Now . . . who is going to buy the mortgage bonds?

I’ll bet the rate on those mortgages will be higher than a standard 30-year, 80% financed mortgage.

They’ll have to be, to attract a secondary market.

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Def sounds like you are right about the higher rate

Side note:
5% down has been the standard for a very long time . . . BUT the buyer has to buy expensive PMI on the “missing” 15%.

Yes. In fact, if the borrower bankrupts against the loan, it’s the PMI company on the hook. Not the lender. That’s what the Mortgage Insurance pays for.

So maybe the interest rate would actually be the same with the 1% down loan. But the PMI would be exorbitant.

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Yes . . . and the dirty little secret is that from a dollars-and-cents view it really makes little difference if you pay $X month for a 15% portion of a home and call it a “loan” or call it “insurance.”

@5%
a $400,000 home with 80% loan —> payment = $2754
a $400,000 home with 95% loan —> payment = $3454

That’s an additional $700/month no matter what we call it.

It is slightly more expensive than paying 14% interest on the last portion of the loan regardless of whether we call it “a loan payment” or “an insurance payment.”