The skyrocketing mortgage rates have led to an affordability crisis in the housing market, prompting Zillow to introduce a 1% down payment option for potential homebuyers. This initiative by Zillow Home Loans aims to shorten the time it takes for consumers to accumulate the funds needed for a down payment. Currently, this program is available to qualified borrowers in Arizona, but there are plans to extend it to other states. According to Zillow Home Loans, reducing the down payment to 1% of the home’s purchase price would enable a homebuyer in Phoenix, Arizona, earning 80% of the area’s median income and saving 5% of their income, to accumulate the down payment in just 11 months. This is significantly less time than the 31 months it would take to save for a 3% down payment.
While many homebuyers aim for a 20% down payment to avoid private mortgage insurance, others choose to make a down payment of between 5% and 20%. Zillow’s 1% down payment option is even lower than Freddie Mac’s mortgage option, which requires a 3% down payment. Zillow also mentioned that it would provide an additional 2% towards the down payment at closing for eligible borrowers, clarifying that this is not a payment to the borrower.
However, this 1% down payment option does not address the underlying issue of housing affordability. A smaller down payment results in larger monthly mortgage payments as borrowers incur more debt. The affordability issue will persist as long as home prices remain high and interest rates elevated.
Currently, the average 30-year fixed mortgage rate is significantly above 7%, adding an additional $1,000 in monthly mortgage payments for a median US home priced at $416,000 compared to last year’s mortgage rates of about 4%.
Zillow’s latest offering is part of its broader strategy to transform from a platform for browsing homes for sale into a comprehensive resource for potential homebuyers. This includes providing direct access to real estate agents and home loans underwritten by the company. This development follows Zillow’s decision to exit its home flipping business after incurring substantial losses.
Source: Business Insider