With the growing diversity of mortgage options, it often pays for consumers to think in advance about some of the more exotic offerings. Here are sketches on some non-conventional loans:
Biweekly mortgages
Any number of lenders can structure mortgages so borrowers pay half their monthly mortgage one week and the other half two weeks later.
Because the average month has 4.3 weeks, biweekly mortgage borrowers make the equivalent of 13 payments a year. For instance, on a monthly mortgage of $1,000, a borrower who pays $1,000 once a month pays $12,000 over a year. The borrower who pays $500 every two weeks pays $13,000 a year.
The bottom line is that bi-weekly mortgages are paid off in 22 years instead of the more typical 30-year term.
On a $125,000 mortgage with monthly payments, the owner would have paid $9,021 of the principal after seven years. The borrower who made biweekly payments on the same loan would have built up twice as much in principal after seven years, said Thomas Smith, vice president of product development for NationsBank.
Of course, borrowers can accomplish the same thing if they make their monthly payment and write a separate check designated for principal only each month.
To follow the biweekly formula, borrowers can divide their monthly payment by 12 and pay that much extra for principal every month. Not only will they enjoy the same early payoff on their mortgage, they also will get to earn more interest on their money because they can keep it in the bank for the full month instead of taking it out for payments every two weeks.
Frequent flier points mortgages
American and United are among the airlines offering free mileage on mortgages. United Airlines offers 1,000 miles for every $10,000 of the mortgage. A borrower gets 10,000 miles on a $100,000 loan. The program is offered through Countrywide Home Loans, 1-800-837-3080, and North American Mortgage Co., 1-800-500-6262. American offers two ways to earn the mileage. One is the same 1,000 miles for each $10,000 of mortgage amount. In addition, borrowers can earn one mile for every $1 of monthly mortgage paid. So someone with a $1,000 monthly mortgage payment would earn 1,000 miles each month. The earn-as-you-pay mortgage comes with a $25 annual fee.
A buyer in the Fort Worth/Dallas area recently earned enough points for 16 round trips anywhere in the United States with the purchase of a $2.7 million house, said American spokesman Willard Dreslin of Dallas.
American’s AAdvantage programs, as the mortgages are called, have been extended for refinancing. For more information or a list of local lenders, call 1-800-852-9744.
Energy efficiency mortgages
Buyers can roll the estimated cost of energy efficiency upgrades, such as insulation and heating systems, into their mortgage. With this program, buyers will get lower monthly utility bills than they would get with their outdated energy systems, said Kathleen Zimmer, national account manager for Countrywide Home Loans, which instituted the program in January.
Buyers must have their house rated for energy efficiency by a state-certified energy inspector. Houses built after 1992 do not qualify because they are considered energy efficient.
If upgrades are needed, the monthly cost cannot be greater than the projected monthly utility savings, Zimmer said. The most common improvements are additional insulation and caulking, she added. For a list of local lenders who offer the loan or a free booklet on the program, call 1-800-903-8366.
Low down payments
Fannie Mae, the nation’s largest source of home mortgage funds, has several loan products that require little or no money down:
– Flexible 97, as it’s called, requires a 3 percent down payment, and the money can come from a credit card, a family gift, an unsecured loan or a nonprofit agency. The mortgage has no income limits, but the borrower cannot use the program to buy a house that costs more than $214,600. The other caveat is that borrowers must have good credit, and the loan requires two monthly payments in advance as a reserve.
“These people should be rewarded for the fact they take care of their credit,” said Tim Carlsgaard, spokesman for Fannie Mae’s regional office in Atlanta. Banks like people with good credit, but they want those people to have a down payment, he added.
– Fannie 97 also requires a down payment of 3 percent, but that money must come from the borrowers. Qualified borrowers can make no more than $43,100 a year. The program requires one month’s payment in advance as a reserve.
– The 3/2 loan is a 5 percent down payment with 3 percent from the borrowers and the remainder from another source, such as a gift from relatives or a grant from a nonprofit agency.
No down payment
Merrill Lynch’s Mortgage 100 program allows clients to buy a house with no money down as long as they have at least 39 percent of the mortgage amount invested through the company. The program allows buyers to invest money that otherwise would go into a house down payment.
One Merrill Lynch executive bought a house in San Francisco through the program about three years ago. He tracked the money he would have spent on a down payment and said it has multiplied, thanks to investments, to the point where he could now pay off his house, said John Bryan, vice president of credit marketing for Merrill Lynch in Jacksonville.
“If he had liquidated his investments for the 20 (percent) to 30 percent down payment, he would have earned nothing,” Bryan said.
One feature that attracts buyers to the program is that it offers 10 years of interest-only payments, which are tax deductible. The loans can be fixed or adjustable, and they come with a variety of features. Borrowers do not have to pay private mortgage insurance, which generally is required when down payments are less than 20 percent.
Buyers should be aware, though, that if the market drops and the level of investment falls below 39 percent of the mortgage, they might have to convert to a more traditional-style loan. Bryan said several safeguards are in place to reduce the chances of that happening.
Tandem loans
Instead of one mortgage, tandem loans have two. One is a traditional mortgage for 80 percent of the value of the house, and the other is for 10 percent of the house value. The down payment is 10 percent.
A key feature of the loan is that borrowers can avoid paying private mortgage insurance.
The difference is that the tandem loans build up equity fast and offer greater tax advantages, said Karen Hart, field support manager of Savings of America’s office in Bradenton, Fla. Tandem loans require only one closing and one set of administrative fees, she added.
While the main loan for 80 percent of the house value lasts 30 years, the second one lasts 15 years.
In addition, buyers can write off the interest from two loans on their taxes instead of writing off the interest from one loan. Features on tandem loans vary, and some come with prepayment penalties.
Some lending institutions will structure tandem loans for buyers. Savings of America offers the loans. For details call 1-800-933-3000.
