I heard a blurb on NPR today about a study that came out showing that a typical black household has 1/10th the net worth of a white household. They also noted that blacks have twice the unemployment rate that whites do. I don’t dispute this and I think there is much work to be done to improve those figures.
But what’s the solution?
A person quoted in the story said that down payment requirements for mortgages need to be lowered and that mortgages need to be made more affordable. However, lowering the down payment requirement would make mortgages less affordable and still not solve the income disparity. Why?
Say family X, regardless of race, decides to get a mortgage on a home valued at $150,000. With a 10% down payment (the standard today), their monthly payment is $766.52, given a 5.5% interest rate on a 30-year term. Cut that down payment to 5% and the payment increases to $809.10, or $42.58 per month. That means that family X needs more income to pay their mortgage.
What are the other effects of cutting the down payment requirement? That means that all persons buying a home at the minimum down payment are now going to have less equity in the home and a higher payment. This also means that lenders must take on a higher degree of risk (both because of the increase in the average size of a loan, and the riskiness of people who meet the down payment requirement), which means interest rates will go up. All of these things make mortgages less affordable.
So, who, exactly, is this good for? Sure, you can get into a house easier, but you’ll also be kicked out that much faster. And, a policy like this is especially going to hurt a minority family who has a smaller income since it will open the door for them to get into a home and then have that home repossessed when they can’t meet the payments on their smaller income.
Instead, why don’t we work on improving the quality of education for all students, starting with parents encouraging kids to do well in school and spending time with them? If kids value education more, won’t they study harder, do better and be more likely to go to college (which has been proven to vastly increase earning potential)? Doesn’t that get right at the heart of the income gap?