I am not sure that this makes a great deal of sense in the housing market in Massachusetts. A consortium of Massachusetts credit unions are offering below market interest rates to first time home buyers who are on the lower end of the income stream. That is all well and good.
But the rub is that these loans are ARM’s, 3 years fixed and then have a 1 percent potential yearly increase capped at 5 percent. So conceivably the homeowner could have a mortgage in 5 years they can not afford, and not enough income or equity to refinance if the market stays down over a period of time.
The Massachusetts real estate market is near a peak, and has the potential of not showing increases or even having decreases over the next couple of years. What a burden to place on a low income family if they end up being upside down in a mortgage.
The list of 13 credit unions that are participating in the program includes HarborOne Credit Union, which has an office in Centerville. The initiative is part of a nationwide program by credit unions that will provide $1 billion in below-market mortgage loans.
“Owning a home is truly the American dream,” said Daniel F. Egan Jr., the president of the Massachusetts Credit Union League. “Buying a home, however, is always difficult, especially for those of modest means. This program will enable many Massachusetts residents to take the major step into home ownership that they didn’t think possible at this time.”
To qualify, borrowers’ household incomes must be at or below the area’s median income.
Participating credit unions will offer qualifying buyers a three-year, adjustable-rate mortgage at one percentage point below the market rate for such loans. The rate will be fixed for three years. After that, it will adjust annually. However, adjustments are capped at 1 percent per year and 5 percent over the life of the loan.
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If the C.U.s underwrite correctly, they can see if the maximum rise fits the borrower's prospects. With the 5% cap, and a reasonable down payment, this could work well.
Clearly, this will be a limited program. C.U.s won't be able to offer a lot of these loans without sacrificing an important part of their income. The resulting loans won't be marketable without realizing the mark-to-market loss that the sub-market interest rate implies.