Rhode Island Uses Regional Deposit to Help First-Time Home Buyers Get 3.99% Mortgage Rates.
Here’s something creative that I haven’t seen many people try (except for home builders) to bridge the affordability gap.
The State of Rhode Island uses treasury deposits placed directly with local banks and credit unions to fund mortgages.
The result helps the first-time home buyer secure a 30-year fixed mortgage at below-market rates, starting as low as 3.99%.
In addition, no private mortgage insurance (PMI) is required for these loans, regardless of the down payment.
Together, it may be enough to get more homeowners in the door, despite the continued difficulty of availability.
How RI AnchorHome Works: 3.99% Mortgage Rates and No PMI When Buying Your First Home
Although it sounds like the temporary and permanent purchase price offered by home builders, it works in a very different way.
Instead of the state giving out grants or being a real estate lender, they put public money into savings banks.
In turn, those participating banks are armed with more capital, giving them the ability to offer below-market real estate prices to select applicants.
The program is known as “RI AnchorHome,” and is sponsored by the office of Treasurer James A. Diossa.
The way it works is simple. An eligible first-time home buyer gets approved for a mortgage through one of the participating lenders (such as Navigant Credit Union, Coastal 1, or Washington Trust).
Then the State of Rhode Island puts matching funds into that financial institution to reduce the cost of offering below-market interest rates without PMI.
Those deposits provide the bank with a source of cheap money, and as such they can offer the buyer a special 30-year fixed rate as low as 3.99%, despite rates currently hovering around 6.50%.
Importantly, the home buyer still receives a traditional loan that is issued and provided by the bank. And the state does not take any credit risk.
The program began as a pilot with a $60 million deposit and was recently expanded to $80 million after unanimous approval by the Government Investment Commission.
Deposits are short-term, fully compounded, and renewed annually, so the state retains control over its money while receiving a small return.
A smart public-private partnership designed to make homeownership more accessible in a high-end neighborhood without the usual gimmicks.
This Looks Like a Good Deal, But Look at the Closing Costs!
Whenever I see deals like this, I tell people to look at the big picture. There is no free lunch, although in this case borrowers may actually win.
The government is actually giving up the potential yield on its deposits to make these low mortgage rates possible to improve its situation, with no real downside to the home owner.
Of course, buyers must still qualify under general underwriting guidelines, complete first-time home buyer counseling, and meet certain program rules.
These include being a first-time home buyer, purchasing a primary residence in Rhode Island, and having an income greater than 110% of the state median.
Finally, the maximum loan amount is $525,000 for a single-family home and $575,000 for a duplex.
But besides that, if you can beat the advertised low rate of 3.99% and there are no excess closing costs, what’s not to like?
Oh, and if you put down less than 20% and can avoid PMI at the same time, it’s even more fun.
After all, one could argue that the higher the loan at 3.99%, the better.
The RI Treasurer’s office says the goal is to build productive wealth and strengthen local communities.
It will be interesting to see if other states begin to emulate this deposit-based model in the future.
Here in California, we rely on alternatives, such as the “Shared Dream Loan,” which requires a down payment to get a share of future equity.
While they are all great programs on the surface, you wonder if they often deal with the demand side as opposed to the supply side of the problem.
Read on: Try my new loan rate calculator to see how much you could pay at different interest rates.
