Many big mortgage lenders like Bank of America and Wells Fargo have reduced their down payment for home purchases to 3%. And with the entry of the other players like United Wholesale Mortgage and Guaranteed Rate, it has even further dropped down to a 1%. This is great news to real estate investors everywhere.
In fact there are a few regional lenders such as Bancorp South and Fifth Third that have even taken the no-down-payment route. While this may be extremely beneficial to investors, it might eventually create some trouble in the housing market.
So how could loose lending benefit Investors?
It is quite simple. If the borrowers are not required to put any money on down payment of homes that they wish to buy, the demand for homes will automatically increase. This demand will create a definite rise in home prices. Therefore if you have bought a real estate property today by making no down payment, you can be assured of a heavy gain when you sell it later on.
It doesn’t stop there. The excess money that investors gain will be invested in stocks. This will push the stock prices higher, thereby increasing the profits. It is all inter-connected.
As it is even without the zero down mortgages the home prices were on fire. With zero down mortgages, the kind of gains that the homeowners will start seeing can only be imagined.
While this is only on paper, it can be converted to cash if cash-out refinancing options are eased out. With the home prices increasing, the excess cash that the home owners get to gain is quite a lot. This kind of cash, once spent, can improve the economy and the stock market, thereby boosting the equities.
However, there is a major hitch here – It might create a huge stock market bubble. If a crash of the stock market follows, it might even lead the economy into a deep depression, causing problems everywhere.
So, essentially, in this situation we have a combination of low down-payment mortgages and home owners who think they are way richer than they actually are. To this combination, you can even add super low mortgage rates.
It is just a matter of homeowners becoming over leveraged and they will start their speculative games with the surplus funds that they have managed to gain.
So far it is only about the very wealthy and the corporations accessing cheap money. But once it trickles down to the masses, situation can turn very risky.
This is likely a temporary winning phase which might create another bust. Nevertheless, with an overheated stock market there is going to be a lot more gains.
The idea is to be prudent and make sure you don’t get burned during the process.
Everyone should be getting wealthy and rich very soon. But this is only until things start turning towards worse. Luckily we are still in the early stages, where things are still very much under control. There is still a hope that we may not repeat the same mistakes time and again.
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