Not a Good Sign: Zillow Offering 1% Downpayment Loans

( – This isn’t a good time to be buying a new home. With interest rates rising fast, mortgages are suddenly a lot more expensive than we’ve been used to. Now a major real estate marketplace says it’s going to ease the burden by offering mortgages with just a 1% down payment. A lot of people are going to be tempted by that — but it could have very unpleasant consequences.

After years of interest rates hovering just above zero, in April 2022 the Federal Reserve started raising its base rate in an attempt to bring inflation under control. It’s now at 5.25%, far above last March’s 0.25%, and anyone whose fixed rate is expiring faces a sudden huge jump in monthly interest payments.

For buyers — especially first-time buyers, who don’t already have equity built up in their existing property — the prospect of taking out a new mortgage at today’s rates is daunting. Now Zillow, the US’s most popular real estate website, is trying to lure in customers with a very tempting offer.

Zillow’s Home Loans division is now offering Arizona buyers a mortgage based on a down payment of just 1% of the property’s price; on closing it will contribute another 2%. If you’re contemplating a new mortgage, and wondering how you’ll cope with the repayments right after you spend all your savings on a 10% down payment, this looks like a great deal. Financial experts aren’t happy, though.

Shmuel Shayowitz of mortgage broker Approved Funding compared the new Zillow deal to “putting candy in front of a baby.” He said it would encourage people to buy homes they can’t really afford. Steve Nicastro of Clever Real Estate warned that such a low down payment could leave customers stuck with more expensive mortgage insurance as well as higher monthly loan payments.

So Zillow is now offering mortgages tailored for people who might not be able to afford them. If this sounds at all familiar, that’s because it is. Giving mortgages to people who couldn’t really afford them is what caused the 2008 financial crash. Unfortunately, Zillow, founded two years before that crash, seems to have missed the lesson.

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