The mortgage industry's first crack at a so-called "portable mortgage" lets home buyers today lock in record low interest rates they can also use on another home they may purchase years down the road when rates could be higher.
E*Trade Mortgage's "Mortgage on the Move" probably isn't for some first-time home buyers who plan to move soon and first buy in a housing market with "bubble" potential. The mortgage industry's latest spin, however, can be a good deal especially for buyers who are staying put for a while in stronger markets.
"Take the consumer who is looking to expand the affordability of housing based on the current rate environment. That's who will be attracted. If you believe rates five years from now will be up, it's a good product. It offers flexibility for some borrowers, but it may not be the choice of others," said Robert Bernabe, head of retail mortgage lending at E*Trade Group.
The group is an online banking and brokerage firm that's looking to expand it's mortgage lending share of the market. The E*Trade Mortgage division originated only $6.2 billion in mortgages in 2002, a fraction of the $2.5 trillion home-loan market nationwide.
Here's the deal.
The portable mortgage is available on purchase mortgages of $60,000 to $1 million. On Monday June 9, E*Trade quoted a portable mortgage fixed rate of 5.875 percent with zero points (0.375 percent more than E- Trade's zero-point rate for a jumbo loan).
Bernabe said other loan costs are typical of any mortgage and you can buy down the rate with points.
E*Trade's portable mortgage must be 80 percent of the property value, that includes the original loan and a loan for a move-up or move-down property. You can only transfer the mortgage once.
On a move-up purchase, the loan amount of the remaining balance from the original loan retains the original portable mortgage rate, but the amount is re-amortized for the remaining term of the original loan. If you need more mortgage for the move-up you'll have to finance that amount at the going rate. That loan will be amortized over the remaining term of the original portable mortgage.
For example, let's say you originally financed $500,000 at 5.875, but in five years paid it down to $475,000 and need another $75,000 for the move up home. The $475,000 would retain the original rate with payments re-amortized for 25 years. The $75,000 would be financed with going mortgage rates available from E*Trade also over a 25 year term.
Bernabe said add the two payments on the two loans for your monthly mortgage payment. Both mortgages will be considered as a single first mortgage, not a first and a second.
"It's a first mortgage with two different rates. Both new mortgages will have the same term," he said.
On a move-down purchase, the portable mortgage rate is applied to the new home's loan which is re-amortized over the remaining term of the original loan. For example, if you purchased a home for $500,000, paid it down to $475,000 in five years and purchased a $300,000 home and financed 80 percent, the $240,000 amount financed would carry the original portable mortgage rate for 25 years.
In the event that you don't have enough to pay off any balance on the mortgage on the first home -- say to move-up in a depreciating market -- you'll have to come up with the difference, before you can proceed with the original rate on the the new home's loan.
"This is an idea whose time has come," said John Burns, president of Irvine-based John Burns Real Estate Consulting Inc.
"Though clearly beneficial to consumers, few mortgage companies have been able to pull off a portable mortgage in the United States. This era of declining rates and rising housing prices won't last forever," he said.