Mortgage `specials' require a keen eye
If a merchant can't offer a lower price than the shopkeeper next door, he may offer ``specials'' on some items to get people in the store. Of course, prices on other items may go up, leaving the customer to figure out which items - and which store - offer the best deal. Something like that is happening in the home mortgage business. Until a week or so ago, mortgage rates held steady at about 9 to 9 percent for a 30-year fixed rate loan. You can pay a percentage point or so less for an adjustable rate mortgage, or you can move the fixed rate up or down a bit by paying more fees, or ``points.'' In general, however, there isn't much difference between one competitive mortgage lender's rate and another's.
So without the lure of lower rates to bring in their share of this spring's househunters, lenders are resorting to some novel variations on the traditional home mortgage. You can get a mortgage without having a lender check into your finances. Or you can obtain a loan without paying points or closing costs. And if you need a bridge loan, you can get one where no payments are due for the first six months.
Some of these loans give borrowers an excellent opportunity to get a home loan they can afford. Others require a little bit of digging to see where the bargain is, if there is one.
And while these loans present new opportunities and dangers for borrowers, they also present opportunities and dangers for investors who might be buying these mortgages on the secondary market.
One such loan was introduced about a year ago. It's called the ``no documentation'' or ``non-income verification'' mortgage. These loans require a 20 to 30 percent down payment, but the bank does not check on your finances, including your income or credit standing. The loan is based on the presumed strength of the real estate. In other words, the lenders figure a large down payment gives the homeowner a big piece of equity at the beginning, and this, combined with the expectation that the house will at least hold its value, gives the lender good collateral in case of default.
One of the first to offer this loan was Dime Savings Bank of New York. It has since been offered by Citicorp Homeowners Services, a St. Louis-based subsidiary of the New York bank, and by Sears Mortgage Corporation in Chicago.
``These are good, solid loans,'' says Edward B. Kramer, director of marketing at Dime. ``The risk [to the bank] might seem greater, but it just isn't there.'' Many of the people taking out these loans, Mr. Kramer says, have already sold another home and are prepared to put down ``much more than 20 percent.''
The loans also appeal to people who don't want to divulge their finances - or the source of those finances - to a banker in order to buy a house, Kramer acknowledges. ``Why should people who can afford to put 20 percent or more down have to show a banker their tax forms?'' he asks.
While these loans have obvious appeal to borrowers, they are not without risk to borrower or investor, says James Grant, editor of Grant's Interest Rate Observer, a newsletter based in New York.
``The banks are so confident of an ever-rising or ever-stable real estate market they feel comfortable with these loans,'' Mr. Grant says. ``That confidence may not be warranted.''
In another apparent boon for borrowers, several lenders are heavily promoting mortgages with ``no points and no closing costs.'' At first glance, this seems like a great deal. On an $80,000 mortgage, two points add up to $1,600. Throw in about $4,000 in closing costs, and you've got an expense of $5,600, plus the down payment. For some people, this may be too much and that $5,600 can make the difference between being able to buy or keep renting.
But the savings don't come without a price. At Farragut Mortgage Company in Boston, for instance, the interest rate on a 30-year mortgage with no points or closing costs is currently 10 percent. With one point and closing costs, the rate is 9 percent, and with two points and closing costs, the rate drops to 9 percent, says Patty Clapp of Farragut.
But what a difference a percentage point or so makes. The principal and interest on that $80,000 loan would cost $732 a month at 10 percent, $672.80 at 9, and $658.40 at 9. Thus, if you plan to stay in the house for only a couple of years or so, the higher rate with no charges is the better deal. But if you plan to settle in for a while, take the lower rate - unless, of course, you need the savings now to make the down payment.
Even before you move in, however, you have to find the house of your dreams. What if you find that house but you haven't sold your old house yet? No problem. The lenders have an answer for this problem, too. It's called a bridge loan. Unlike some bridge loans that can leave you making payments on the old mortgage, the new mortgage, and the bridge loan, this one lets you put off bridge loan payments for up to six months.
But like all bridge loans, this one is lent against the value of your old house. So if you had trouble selling it, the lender could repossess it. The chances of this happening partly depend on what region of the country you live in and how quickly, and for how much, homes are selling. If you're confident your old house will sell fast and give you the profit you need, these bridge loans could be a good answer.
All of these innovations could be very good - or very bad - for homebuyers, and they should all be approached with open eyes and some skepticism. ``In finance or investments, if everybody wants you to do something,'' Mr. Grant observes, ``it's often a good time not to do it.''
If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.