Here’s something creative I haven’t seen many try (other than the home builders) to close the affordability gap.
The State of Rhode Island is using treasury deposits placed directly with local banks and credit unions to subsidize mortgage rates.
The end result is helping a first-time home buyer secure a 30-year fixed mortgage at below-market rates, starting as low as 3.99%.
In addition, there’s no private mortgage insurance (PMI) required on these loans either, regardless of down payment.
Collectively, it might be enough to get more homeowners in the door, despite ongoing affordability woes.
How RI AnchorHome Works: 3.99% Mortgage Rates and No PMI When You Buy Your First Home
While it kind of sounds like the temporary and permanent rate buydowns being offered by home builders, it operates quite a bit differently.
Instead of the state handing out grants or becoming the actual mortgage lender, they’re strategically depositing public funds in local depositories.
In turn, those participating banks are armed with more liquidity, giving them the ability to offer below-market mortgage rates to select applicants.
The program is known as “RI AnchorHome,” and is being facilitated by Treasurer James A. Diossa’s office.
How it works is fairly simply. A qualifying 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 deposits matching funds into that same financial institution to offset the cost of offering a below-market interest rate with no PMI.
Those deposits provide the bank with a source of low-cost funding, and in return they can offer the buyer a special 30-year fixed rate as low as 3.99%, despite rates being around 6.50% currently.
Importantly, the home buyer still gets a traditional mortgage issued and serviced by the bank. And the state doesn’t take on any credit risk.
The program started as a pilot with $60 million in deposits and was recently expanded to $80 million after unanimous approval from the State Investment Commission.
The deposits are short-term, fully collateralized, and renewed annually, so the state keeps control of its cash while earning a modest return.
It’s a clever public-private partnership designed to make homeownership more attainable in a high-rate environment without the usual gimmicks.
This Looks to Be a Good Deal, But Check the Closing Costs!
Whenever I see deals like this, I tell people to look at the big picture. There is no free lunch, though in this case borrowers might actually win.
The state is essentially giving up some potential yield on its deposits to make these lower mortgage rates possible in order to better its state, with no real downside to the homeowner.
Sure, buyers still have to qualify under normal underwriting guidelines, complete mandatory first-time homebuyer counseling, and meet specific program rules.
Those include being a first-time buyer with no other property, buying a primary residence in Rhode Island, and having an income of no more than 110% of the statewide median.
Lastly, the maximum loan amount is $525,000 for a single-family home and $575,000 for a duplex.
But other than that, if you can snag the low advertised rate of 3.99% and there aren’t excessive 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 sweeter.
After all, one might argue that the more money borrowed at 3.99%, the better.
The RI Treasurer’s office says the goal is to build generational wealth and strengthen local communities.
It’ll be interesting to see if other states start emulating this deposit-based model in the future.
Here in California, we’ve relied on other approaches, such as the “Dream For All Shared Appreciation Loan,” which requires zero down payment in exchange for a share of future equity.
While they’re all good initiatives on the surface, you do wonder if they mostly address the demand side as opposed to the supply side of the problem.
Read on: Try out my new mortgage rate calculator to see how much you can afford at different interest rates.
