The affordability of housing continues to be the main problem new homeowners face in the housing market, especially for first time buyers. Many are families are rejected due to high initial payment-to-income ratios. These families’ incomes are so low that they are not able to afford the initial down payment. There are several methods that can be used to assist families with down payments, as well as, mortgage payments.
First, changes can be made in either the income available to households or the way monthly mortgage payments are calculated (Rosen 166). Households are discriminated against due to the fact that they are limited to what they can borrow based on current income, not on their future potential income. Here are several different types of mortgage methods recognizing the housing affordability problem and how it is artificially created by the inflation premium built into mortgage interest rates:
Shared-Appreciation Mortgages
(SAMs)
Equity-Adjusted Mortgages (EAMs)
-both allow households to borrow
against the expected appreciation of
their properties
Graduated-Payment Mortgages
(GPMs)
-provide for a better matching
of payments to income over time by
allowing lower payments
in the initial years of a mortgage, which
then increase annually
at a specified rate for a specified number of
years
Variable-Rate Mortgages (VRMs)
-operate by pegging mortgage
rates and payments over the term of the
loan to interest rate
indices
-lenders could offer these loans
at somewhat lower initial rates to
reflect the lowered risk
-also reduces initial
payments and improves affordability
Dual-Interest-Rate Mortgage
with a Graduated-Payment Mechanism (DIM-GPM)
-provides implicit loans
to purchasers and lower payments in early
years
-thought to hold the most
promise for resolving affordability problems
in the 1980’s
These definitions were taken from: Rosen (1984)