Zillow is offering 1% down payment on homes to lure struggling buyers as US mortgage rates hits 22-year high

Zillow is offering a 1% down payment on homes to lure struggling buyers amid rocketing mortgage rates – but experts warn the scheme could trigger the next credit crunch. 

The online property marketplace is extending the proposal to buyers in Arizona to ‘lower the barrier to entry and make the dream of owning a home a reality’. 

It comes as US mortgage rates hit a 22-year high – with buyers now facing taking mortgages out which cost an extra $1,000 a month than they would have if they bought two years ago. 

Zillow’s scheme has been praised for helping more people get on the property ladder. But critics warn it risks saddling people with more debt than they can afford and could potentially trigger a slew of defaults of the sort that caused the 2008 credit crunch.  

The average rate on a conventional 30-year fixed-rate mortgage jumped to 7.31% last week, up from 7.16% the previous week, according to The Mortgage Bankers Association (MBA).

Average US house prices hit $416,100 by the end of the second quarter of 2023. A person able to secure a mortgage that size with a one percent downpayment would face repayments of $2,996-a-month if they took out a 30 year mortgage, or $3,383 on a 20 year mortgage. 

Home buyers are facing their highest mortgage rates since 2002, as experts warn higher loans the property market to a screeching halt

Zillow is proposing first time buyers in Arizona make the tiny down payment to ‘lower the barrier to entry and make the dream of owning a home a reality’

Through Zillow’s latest offer for people in the Grand Canyon State, an eligible buyer pays just 1% toward a down payment and receives an additional 2% at closing. 

This boosts it to 3% overall – the typical minimum payment required for a conventional home loan. 

Zillow Home Loans’ senior macroeconomist Orphe Divounguy said the scheme aims to help more people purchase a home. 

‘For those who can afford higher rent payments but have been held back by the upfront costs associated with homeownership, down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality,’ he said. 

‘The rapid rise in rents and home values means many renters who are already paying high monthly housing costs may not have enough saved up for a large down payment. 

‘These types of programs are welcome innovations in lowering the potential barriers to homeownership for those who qualify.’

Surging mortgage rates are sidelining many aspiring homeowners – with applications down to a 28-year low, according to the MBA. 

Zillow’s offering aims to widen the net of eligibility for first time homeowners – but it could have adverse effects on the economy. 

Rates have not hit 8 percent since 2000, according to data compiled by Freddie Mac

People applying for mortgages with the incredibly low down payment could more easily fall into the trap of taking on more debt than they can afford. 

A change in their financial circumstances – or a future stretch of inflation that pushes interest rates high – could result in them losing their home and defaulting on payments. 

Rising debt can slow economic growth as consumers have less money to spend while they struggle to pay off their arrears.