Zillow is offering 1% down payment on homes to lure struggling buyers as US mortgage rates hits 22-year high

Zillow is offering a 1% down payment on homes to lure struggling buyers amid skyrocketing mortgage rates, but experts warn the plan could trigger the next credit crunch.

The online real estate marketplace is extending the proposal to Arizona buyers to “lower the barrier to entry and make the dream of owning a home a reality.”

It comes at a time when US mortgage rates have hit a 22-year high, with buyers now facing mortgages that cost an extra $1,000 a month than if they bought two years ago.

Zillow’s plan has been praised for helping more people get up the real estate ladder. But critics warn that this risks leaving people with more debt than they can afford, and could potentially trigger a slew of defaults of the kind that sparked the 2008 credit crunch.

According to The Mortgage Bankers Association (MBA), the average interest rate on a 30-year fixed-rate conventional mortgage rose to 7.31% last week, compared to 7.16% the week before.

The median U.S. home price was $416,100 by the end of the second quarter of 2023. Someone who can take out a mortgage of that size with a one percent down payment would have to pay $2,996 a month in principal if they took out a 30-year mortgage, or $3,383. on a 20-year mortgage.

Zillow suggests new buyers in Arizona make a small down payment to “lower the barrier to entry and make the dream of owning a home a reality”

Through Zillow’s latest offering for people in the state of Grand Canyon, a qualifying buyer pays just 1% as a down payment and receives an additional 2% at closing.

This raises it to 3% in total – the typical minimum payment required for a conventional home loan.

Zillow Home Loans senior macro economist Orphe Divounguy said the scheme aims to help more people buy a home.

“For those who can afford higher rent payments but are held back by the upfront costs associated with owning their own home, assistance with paying a down payment can help lower the barrier to entry and make the dream of owning a home a reality. to do,” he said.

“The rapid rise in rents and home values ​​means that many tenants already paying high monthly housing costs may not have saved enough for a large down payment.

“These types of programs are welcome innovations in lowering the potential barriers to homeownership for those who qualify.”

Rising mortgage rates are sidelining many would-be homeowners — with applications plummeting to a 28-year low, according to the MBA.

Zillow’s offerings are intended to increase the reach of first-time buyers in the housing market, but this could have a negative impact on the economy.

According to data collected by Freddie Mac, rates have not risen to 8 percent since 2000

People applying for a mortgage with an incredibly low down payment could more easily fall into the trap of taking on more debt than they can afford.

A change in their financial circumstances – or future inflation that pushes interest rates high – could cause them to lose their home and become unable to make their payments.

Rising debt can slow economic growth as consumers have less money to spend as they struggle to pay off their arrears.