Real Estate Newsby Peter G. Miller
OurBroker®
Bi-weekly mortgages have traditionally been a niche loan with appeal to
only a small segment of the marketplace, but now a new bi-weekly product is
likely to make such mortgages far more interesting to consumers.
Called the "working mortgage," the new product has been developed by Fannie Mae and is now
available on a pilot basis through four lenders: Bank One Mortgage, Citicorp
Mortgage, FT Mortgage, and Old Kent Mortgage.
In general terms a bi-weekly mortgage works like this. Instead of making a
monthly payment for $1,200, you instead make partial payments every two weeks,
say $600. At the end of the year, with monthly payments you would have paid
$14,400 (12 x $1,200) for mortgage principal and interest, while with the
bi-weekly you would have sent $15,600 to the lender over the course of a year
(26 x $600).
Thus the "secret" of bi-weekly mortgage savings is no secret at all. Savings
come not because payments are made every 14 days, but rather because bi-weekly
borrowers simply pay more per year, thus their loans are paid off more quickly
and they can save thousands of dollars in excess interest.
The "working mortgage" adds several interesting features to traditional
bi-weekly products, according to John Gang, Fannie Mae"s director of new
product development.
*The program has the same 28/36 ratios that lenders use for conventional
mortgages. However, the program is set up so that underwriting standards are
more flexible. In practice, this means a borrower with a low credit score has a
better chance of getting a loan and a solid borrower may qualify for more
financing than with traditional underwriting standards.
*The program has a payment flexibility feature. While the "working mortgage"
starts out as a bi-weekly product, it may be that instead of a check every two
weeks the borrower will be paid weekly or monthly at some point in the future.
With the "working mortgage" such changes are easy to accommodate -- rather than
re-finance at high cost, just call an 800 number and the loan can be
modified to meet the borrower"s new arrangement.
*Bi-weekly mortgages are usually tied to the use of a checking or savings
account, often one that must be maintained with the original mortgage lender.
Under the "working mortgage" however, borrowers can maintain an account with
the original lender, another lender, savings and loan association, or credit
union, or even some mutual funds. The real criteria is not so much "where" the
account is located as much as the lender"s ability to make electronic
withdrawals from the account. Given that different accounts may pay different
levels of interest or have lower costs, this is an important pro-consumer,
pro-borrower feature.
*The program produces real savings. Fannie Mae estimates that with a
$100,000 "working mortgage" a borrower can save $4,000 in the first five years
with the loan, and $10,000 within ten years.
Fannie Mae has made $250 million available under the pilot program. If a
typical loan is for $100,000, then some 2,500 loans will be available.
The pilot project is expected to continue through the early part of next year,
but the betting here is that the program will run through its initial funding
faster than expected. For details, see the pilot program lenders for specifics
-- while funding remains available.
Question Of The
Week
Q Are there any instances where it
makes sense to finance a realty purchase with a personal loan rather than a
mortgage?
A There are limited instances
where personal loans -- financing not secured by property -- are used in real
estate. For example, timeshares are often financed with personal loans, and
personal loans are used to buy mobile homes not defined as real estate (that
is, a mobile sold with a bill of sale as personal property rather than with a
recorded deed).
But in the overwhelming number of cases, real estate purchases are financed and
should be financed with secured realty debt such as a mortgage or deed of
trust. Interest on such loans is typically deductible, something not true with
personal financing. The usual real estate application process assures good,
marketable, and insurable title -- and requires title insurance to protect
again errors. In terms of dollars and cents, real estate loans typically have
lower rates, longer terms, and smaller monthly payment requirements than
personal loans of equal size.
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