A rewarding part of being a mortgage originator is helping people enjoy the benefits of homeownership. But many in the lending business find it challenging to understand and “get through” to members of the Millennial generation. With historically-low interest rates and a tight supply of homes for sale, they should be leaping at the chance to find a millennial mortgage solution and lock in a mortgage now, right? Members of this generation must not WANT to own a home, right?
Actually, numerous opinion surveys validate that Millennials see the benefits of owning homes just as much as previous generations. Let’s try to understand their concerns.
- Difficulty saving for a large down payment
- Fear of long-term commitment and its impact on lifestyle and financial flexibility
- Discomfort with so little of their payments going toward principal
- Worry about adding additional debt on top of student loans
Okay, so we’ve covered what Millennials DISLIKE…is there anything they LIKE?
Of course! (And there’s a way to structure a mortgage to appeal to these interests…but we’ll get to that next.)
Millennials are attracted to:
Perhaps no generation has been bombarded with images of “role models” who’ve become rich and famous at a young age. But at the same time, no generation will be more challenged to build their own wealth and left on their own to develop strategies to secure their financial future. You can help.
Shorter loan terms.
30 years sounds like forever. To many borrowers, 20 years just feels like a more manageable commitment.
Feeling in control.
A 20-year term makes borrowers “their own landlord.” An average of 60 cents per dollar of PI&I (principal, interest and insurance) goes toward principal paydown versus 51 cents for a traditional 30-year fixed-rate mortgage. And a history of making student loan debt payments on time puts a borrower in more control by establishing a credit history.
Rapid paid-in equity accrual not only builds wealth but it creates financial flexibility — the flexibility to obtain a second mortgage for home improvements or other endeavors, or to roll the equity into a step-up purchase sooner.
So is there a way to create a mortgage for millennials that appeals to these interests?
Yes. MGIC offers a mortgage program called WealthBuilder Pro. Here are the highlights.
Up to 100% financing:
100% financing plus the ability to use gifts and grants to cover loan costs reduces – or even eliminates – the borrower’s own funds requirement versus other financing alternatives.
Shorter loan term:
20-year and 15-year loan term options promote rapid build-up of paid-in equity such that the borrower will have substantially more savings in their home within 36-60 months versus a traditional 30-year mortgage with 3% or 5% down.
Monthly payments reduced sooner:
Under federal law, mortgage insurance automatically terminates in Year 5 on a 20-yr fully amortizing loan. Assuming the same down payment, that’s more than 4 years sooner than a 30-year conventional fixed-rate mortgage and 24 years sooner than an FHA loan! And borrowers may pursue cancellation earlier in the event their home value has risen and they’ve remained current in their mortgage payments. When monthly borrower-paid MI terminates or is cancelled, the borrower’s monthly payment decreases. Bottom line: building equity faster means reducing a borrower’s mortgage payments faster.
Optional permanent buydown:
The interest rate may be further reduced by paying discount points, resulting in more paid-in equity accrual over time. Again, gifts and grants are allowed.
While all debts are considered in the qualifying ratios, loans in the WealthBuilder Pro program allow maximum flexibility relative to student debt. The payment considered for qualifying purposes may be based on an income-based, pay-as-you-earn, or graduated-payment formula provided the borrower can document his/her current monthly payment. Most conventional conforming and FHA loans don’t allow this flexibility, and instead require the documented payment to be based on a fully-amortized schedule and not subject to potential future increases.
Build wealth faster:
Loans in the WealthBuilder Pro program typically have higher initial monthly payments; however, the payments reward borrowers by building equity faster. More home equity gives Millennials added borrowing power and the flexibility to sell the home sooner. They can roll the proceeds into their next home, a new business, or invest as they choose.
WealthBuilder Pro 20-year loans earn $14,082 more equity than conventional loans after 5 years. The mortgage for millennials is here!
The chart above compares two loans, both for the same home with a purchase price of $200,000 and the same buyer, with a credit score of 680. In the case of the Conventional 30-year fixed-rate loan, the interest rate is 3.875% and the borrower would need to come up with a 3% down payment of $6,000, resulting in a monthly PI&I of $1,139. In the WealthBuilder Pro 20-year loan example, the interest rate for a 5-year ARM is 3.125%. The monthly PI&I is $1,267.
The question to ask your borrower: If you could build over $14,000 in additional equity in only 5 years, is that worth $128 per month? (That’s less than $4.50 per day!)
Millennials want to become home owners, but remember this: they’ve NEVER seen a high-rate environment. According to a Redfin survey, five percent of Millennials said they’d give up looking for a house altogether if rates rose by more than 1 point.
The opportunity is here to convert Millennial renters into home owners, but this window of opportunity won’t stay open forever. For more information about Millennials and homeownership see our mortgage infographic below or contact your MGIC Account Manager.
Check out our mortgage infographic on Millennials and homeownership!
What strategies and techniques have you found to be successful when working with millennial borrowers? Share in the comments.Tags: Millennial, Mortgage Education, Mortgage Industry, Mortgage Strategies, Mortgage Trends