Fannie Mae offered two cut-rate options: A new "two-step" adjustable rate loan with the first - and only - adjustment scheduled five or seven years down the road. And a seven-year balloon requiring a rate adjustment or payoff at the end of that term.
Although borrowers might not have focused on the fine print at the time, the balloon loans carry special requirements at the five- or seven-year mark to avoid triggering a lump-sum payoff. If a homeowner wants to keep a Freddie Mac balloon re-set mortgage on the books, he or she has to meet several criteria:
-- The past year's payment history must be squeaky clean, with no payments 30 days or more late.
-- No home equity lines of credit, second mortgages or other liens against the property are allowed.
-- The home must still be occupied and owned by the original borrower.
-- The borrower must make a written request to the lender to re-set the rate and extend the loan within an extremely narrow time window: between 45 and 60 days before the balloon payoff date.
If you fail to qualify on just one of these requirements, your loan could be deemed due and payable in full at the five- or seven-year maturity date. Freddie Mac (the Federal Home Loan Mortgage Corp.) has financed about 500,000 discount-rate balloon loans during the first half of the decade. The only problem, according to Freddie Mac officials, is that as the earliest batches of the five-year balloons reach or near maturity, some borrowers seem to have forgotten that they don't have a standard-issue, 30-year mortgage.
"People think that they can just keep making the (monthly) mortgage payments, but that's not the case," says Freddie Mac Vice President Cam Melchiorre. "This is a different type of animal."
Borrowers should act now
Borrowers with maturing five-year balloons need to respond promptly when their loan servicer writes to them asking whether they wish to re-set the rate, says Melchiorre. The current re-set rate is about 8.625 percent - representing a slight decrease in monthly payments for 1991-vintage borrowers. But those consumers could lose the lower re-set rate and expose themselves to the costs and hassles of refinancing, if they don't get in touch with servicers on time.
Fannie Mae's "two-step" borrowers face a different situation.
Their five-year loans function like true adjustable-rate mortgages, not balloons. There is no lump-sum payoff requirement. There are no special criteria to meet. On the termination date of the initial five-year period, their rates automatically adjust to a new rate, fixed for the next 25 years. Like Freddie's re-set rate, Fannie Mae's two-step adjustment provides the borrower with a new, long-term rate that probably represents a slight decrease from the initial rate. But in both cases, the new rate is about half a percentage point higher than the best-available rate a shopper could find in the 30-year mortgage marketplace.
Which means that five-year two-step borrowers need to confront the same basic question facing Freddie's re-set borrowers: Should we refinance elsewhere or stick with the revised rate on the loan we've got? Either way, though, you've got to be alert to the crucial deadline built into your Fannie or Freddie loan.
To be safe, pull out your mortgage documents and check. You may be one of the thousands whose mortgage clocks are ticking toward a rate-adjustment deadline you forgot.
(Copyright, 1996, Washington Post Writers Group) |
