Shop, Lock and Roll
Another of his offerings - Shop, Lock and Roll - allows home shoppers who haven't yet found a house but are antsy about rising interest rates to lock in a rate for up to 60 days.
"Normally you have to have a purchase and sale agreement before you can get a lock," he explains. For a little extra borrowers can buy a float-down provision, allowing them to get a lower rate if interest rates drop.
Builder's Best
Those purchasing new houses can also lock in an interest rate for up to a year with a Wells Fargo Builder's Best loan. As a result, those whose future homes are in the construction or preconstruction stage potentially can insulate themselves against a year's worth of interest-rate hikes.
Combination loans
At Continental Savings Bank (which on May 15 will be renamed HomeStreet Bank), vice president Craige Naylor says buyers can save money with combination loans equaling 95 to 100 percent of the property's value. Not only do borrowers need just 5 percent or less for the down payment, but they may be able to avoid getting a higher interest rate jumbo loan or paying for private mortgage insurance. (A jumbo loan for a single-family house purchase is any loan over $252,700.)
How? By simultaneously taking out a first mortgage, for say 80 percent of the loan, and a shorter duration second mortgage for the remainder.
"This is good for someone who maybe once a year gets a lump sum, like a bonus," Naylor says. "If they can pay off that second (mortgage) within a year or so, they can greatly increase their cash flow."
Location Efficient Mortgage
Another money saver from Continental is called the Location Efficient Mortgage. Available to Seattle city residents only, it uses a special formula to calculate qualifying income. For many, this translates into being able to buy a more expensive house than they could under conventional financing programs.
Negative amortization loan
Rising local housing costs have resulted in Seattle seeing a type of mortgage popular in California during the 1980s when that state's housing prices went ballistic. Generally called a negative amortization loan, a hybrid of it is being offered locally by First Horizon Home Loans in Kirkland. Mark Everts, a First Horizon broker, calls his product the ALTA ARM. Here's how it works.
Each month borrowers have four payment options. 1. They can pay principal and interest. 2. They can pay principal, interest and extra principal (which pays the loan off faster). 3. They can pay interest only. 4. They can pay no principal and only part of that month's interest, adding the rest to the loan amount.
The deferred interest, combined with no principal payment, results in the original loan amount increasing. That's called negative amortization.
Everts says half his clients immediately veto such a loan, in part because it's based on floating interest rates. Those who embrace it tend to be people with larger mortgages who like to work their money. "When people are carrying $300,000 to $400,000 loans, it literally saves them thousands a month. It leaves them more money to play with or help them out with their own finances," he says.
As for the specter of having a mortgage balance increase over time, Everts says this doesn't necessarily bother borrowers.
"Their feeling is yes, your mortgage balance will increase, but it doesn't increase nearly as much as the value of your home." Indeed, he knows of a case where a borrower's mortgage balance has increased $6,000 over the last two years - but his home's value is up more than $100,000.
Torris McCall, assistant vice president and community lending manager for US Bank, says he's leery of negative amortization loans because "if the housing market flattens out where the value of the house isn't going up as fast, you've got a big problem. You've got houses that aren't worth the money that's lent on them, and that leads to foreclosures" because people can't sell for enough to cover the loan.
Adjustable-rate mortgages
Rather than market negative amortization loans, which US Bank doesn't, McCall prefers adjustable-rate mortgages, particularly FHA's ARM, which he considers the safest. A 30-year loan, its interest rate is lower than normal in the beginning and can go up no more than 1 percent a year, or 5 percent over the life of the loan.
ARMs were popular in the early 1990s when interest rates were higher, then all but disappeared when 30-year rates dropped to 6 percent or so. Basically short-term fixed-rate mortgages, they come in many varieties, but all work the same way. At the end of the fixed period, the interest rate changes in accordance with current economic indexes.
Randy Weber, president of Seattle Holding Company, owner of Seattle Mortgage, says he's seeing renewed interest in five-year ARMS. These are 30-year loans that have a fixed interest rate for the first five years that's about half a percent less than a standard 30-year fixed. Also attracting consumer attention is the one-year ARM.
There are also three-year and seven-year ARMs. All offer an initial lower interest rate, in effect buying the borrower time to wait for rates to drop to the point where refinancing makes sense.
"My feeling is the consumer has just got so many options," Weber says. "We have anywhere from a one-year ARM to 10-year balloons so everyone has an opportunity to do what they want. It's really a smorgasbord for the consumer."
A balloon mortgage has set payments for a specified number of years, then a "balloon" or final payment of the remaining balance. The benefits can be paying interest-only payments for the first few years, or having a lower mortgage payment on a loan the borrower knows is short-term because a move is planned.
Keith Gumbinger, mortgage analyst with HSH Associates, a mortgage information company, has additional strategies for keeping house payments down when interest rates rise:
-- Borrowers with spare cash can pay extra points to lower the interest rate. This is only beneficial for those who plan to stay put for many years. For example on a $100,000 mortgage, paying two points ($2,000) will lower an interest rate half a point. After five years, you'll break even.
-- Borrowers can request a shorter commitment period. Gumbinger says the public may not know it, but lenders have a fair amount of leeway in the time needed to close a loan. Often they quote an average length of 45 days. Borrowers with good credit and paperwork in order may be able get a lower rate by closing earlier. It's worth asking about, Gumbinger says.
-- Buy a float-down option. If you've locked in an interest rate but suspect rates may drop before your loan closes, you can pay an eighth to a quarter of a point to get that lower rate if indeed it becomes available.
-- Lowering the monthly payment by putting more down. Here's an example. A $100,000 mortgage at 7 percent generates a $665 a month payment. If the interest rate goes up to 7 1/2 percent, putting down an additional $5,000 will keep the monthly payment at $665.
But Gumbinger's primary piece of advice for would-be borrowers is not to panic. "Mortgage rates are notoriously fickle," he says, and can drop just as quickly as they climb. But if they do go up, calling around to several local loan officers, and shopping on-line, may uncover just the right mortgage to take the sting out of that rate hike. |
