A budding kind of mortgage, the Wealth Building Home Loan, offers a much safer and secure path to financial security than the traditional 30-year mortgage, American Enterprise Institute scholars Edward Pinto and Stephen Oliner wrote in an AEI report this week.

AEI is one of the leading conservative think tanks in Washington, D.C.

Wealth Building Home Loans have terms of 15 or 20 years and require little or no down payments. They are structured with lower interest costs earlier so that more of the beginning payments go toward principal, building equity faster. The interest rate on WBHLs goes up after a minimum of five years.

By contrast, the principal on conventional 30-year mortgages amortizes much more slowly, with nearly all of the early payments going to interest.

Another plus of the loans, said the advocates, is that defaults will likely be lower because underwriting standards are tighter. In addition to standard debt ratios, underwriters consider the mortgage amounts that would leave borrowers comfortably able to meet other living expenses so that they don’t stretch their incomes to buy too much house.

By building more equity quicker, they said, borrowers are more likely to stay current after a loan modification.

The increased equity early on aids borrowers when they have a temporary drop in income, said Pinto and Oliner.

“For example, if the income loss occurred at the end of the third year of the loan, a 15-year WBHL would have 12 years remaining. Extending the term to 14 years would reduce the monthly principal and interest payment by 12 percent. With a traditional 30-year loan, the term would have to be extended to 35 years to reduce the monthly payment by the same percentage,” they said.

These loans are still in their infancy. MGIC, a national mortgage insurer, has started offering them through a pilot project.

The Neighborhood Assistance Corporation of America, an urban non-profit, has been doing good business with this loan, Oliner said. He noted about 20 percent of the home loans NACA has issued in recent month have been Wealth Builder Home Loans.