Some new mortgages finding favor with buyers
The 15-year, fixed-rate home mortgage is gaining new strength.
There has been strong buyer interest in 15-year Federal Housing Administration and Veterans Administration loans, as well as conventional loans, according to Tom Collins of Allstate Enterprises Mortgage Corporation, Deerfield , Ill.
''At today's rates,'' Mr. Collins says, ''this is probably the best deal a buyer can find.'' Because of the shorter payback period, the owner's equity in the house increases rapidly, he adds.
Some of the more unusual mortgage plans available, which buyers often perceive as risky, have not gone over well in the marketplace. Craig Foster of Foster & Foster, Acton, Mass., says: ''We see a conservative wave going through the market. The bells and whistles in financing plans aren't attracting many people.''
One plus of the 15-year plans is that the interest rate is fixed.
The 15-year programs are most popular when interest rates are high, however. Under those conditions, the monthly payment may be roughly comparable to a 30 -year plan. On a $50,000 loan with the interest at 16 percent, for example, the monthly payment for a 15-year mortgage (principal and interest) is $721.32, compared with $672.38 for a 30-year plan.
Thus, the buyer can save a lot of money in interest payments.
On the other hand, as interest rates drop, the difference in payment grows. At 13 percent, the monthly payment for a comparable 30-year loan is $572.71, whereas a 15-year plan costs $632.62. At the end of five years, $49,131.79 would remain on a 30-year mortgage, while $42,369.52 would be left on the 15-year option.
Assuming interest rates dropped even more, the 15-year plan would look increasingly unattractive compared with a 30-year mortgage, according to Mr. Collins.
Allstate also offers a 15-year, graduated-payment mortgage for buyers who can't initially afford the monthly costs of a regular 15-year plan. This option has graduated payments for the first four years, but there is no negative amortization, where payments are insufficient to reduce the principal balance of the loan.
Another program that is gaining in popularity is the growing equity mortgage (GEM), in which payments increase 4 percent a year throughout the term of the loan. The additional amount of payment is applied to the principal of the loan.
The catch, of course, is that a home buyer has to anticipate a rise in income over the next several years. The appeal is often to first-time buyers, who need lower payments in the first few years of the mortgage.
''This is not an option for the fixed-income consumer,'' points out Donald Campbell at the Federal National Mortgage Association, also known as Fannie Mae. ''It's definitely geared to the consumer who knows his income will go up.''
While some buyers cannot anticipate this rise in income, the GEM was considered the second-most-popular option for consumers after a fixed-rate, 30 -year mortgage, according to a recent Fannie Mae survey. The prospective buyer can know exactly what his payments will be each year. Also, there are no risks, such as those of the balloon mortgage, for example, which comes due in a short three to five years.
Mr. Foster says ''the GEM makes a great deal of sense, especially in terms of a young market with two incomes.'' He points out that it would not be of as much interest to a transferee or a trade-down ''empty nester.''
The strongest merit of the GEM is the savings in interest over a fixed-rate loan. On a $100,000 mortgage, for example, where the rate is 12.5 percent, the first year's monthly payment is $1,090.35, the same as a 30-year, fixed-rate mortgage. By the seventh year of the mortgage, a GEM payment rises to $1,379.63. At that time the balance left on the 30-year mortgage would be $93,512.84, whereas under the GEM program only $78,010.74 would remain.
By the 13th year, in which the GEM mortgage can be paid off, the monthly payment would be $1,745.68. The balance remaining on the 30-year mortgage, on the other hand, would be $81,137.76. The total interest paid on the GEM is roughly half that of the 30-year plan.
Collins points out that anyone can turn a 30-year, fixed-rate mortgage into a GEM simply by raising the payments 4 percent annually of his own accord. The advantage, he says, is that if money gets tight, the buyer can simply revert to normal payments.
While he will not get the advantage of a lower interest rate, he will save considerably in interest costs.