experimental loans
'Power' Mortgages Allow Borrowers to Skip Payments
By Kenneth R. Harney
Saturday, October 12, 2002; Page H01
washingtonpost.com
Would you like to be able to skip a mortgage payment or two on your home now and then, with no penalty or negative impact on your credit files?
Would you like to hold on to your December and January mortgage payments and devote them instead to holiday gifts or credit card payoffs?
Or maybe take a vacation from your mortgage for a month or two during the summer, when you would prefer to spend the money elsewhere?
Well, you just may get your wish.
Fannie Mae, the nation's largest source of home mortgage money, is conducting pilot tests with lenders around the country on a loan concept it calls "payment power." In most respects, the new mortgage works like any standard 30-year, fixed-rate home loan. But it comes with a built-in feature that you can either use or hold in reserve: the contractual right to skip up to two monthly payments per year -- anytime -- or up to 10 payments during the life of the loan. The "skip" feature is available on mortgages for purchases or refinancings of single-family houses, two-unit houses or condominiums.
There is no late fee or other charge when you exercise your right to skip. The unpaid amount simply gets added onto the principal balance of the loan and is amortized over the remaining term of the mortgage.
Here's a hypothetical example: You borrow $150,000 for 30 years at 7 percent. Your monthly payment, including escrowed taxes and insurance, comes to $1,297.99. When you decide to skip, you contact the lender in advance. The lender will verify that your on-time payment history qualifies you to miss the upcoming month's payment.
The $1,297.99 regular payment is added to your principal balance and capitalized over the remaining term of the mortgage -- in this case producing a revised, post-skip monthly payment of $1,306.65, an $8.66 increase.
Each time you skip, the same procedure occurs. In effect, for a relatively small addition to your payment you get to keep cash in your pocket to spend on whatever you need. Your lender's report to the three national credit bureaus will treat your skipped month as a regular on-time payment, rather than as a default that dings your credit scores.
Who might be attracted to the right-to-skip feature? According to a senior official of one of the lenders participating in Fannie Mae's nationwide pilot, the range of candidates is wide.
Mark Vinciguerra, executive vice president of Toledo-based Northern Ohio Investment Co., says first-time buyers, refinancers with seasonal income flows, teachers and skilled laborers whose workloads decrease periodically appear to be especially interested in the experimental loan, which Vinciguerra markets as the "rainy day mortgage."
Although his company only recently began offering the concept, Vinciguerra rates it as potentially "one of the hottest products" on his firm's loan menu. In the "rainy day" version, purchasers or refinancers pay or share a one-time, upfront charge of about $600 on a $100,000 loan. That can be split between home sellers and buyers, or real estate agents and buyers, or simply added into the interest rate on the note.
Other lenders taking part in the national pilot, including Countrywide Home Loans Inc., are expected to require an upfront participation fee as well. Countrywide, one of the largest lenders in the nation, expects to roll out its version of the "payment power" mortgage in December.
Although Vinciguerra assumed that home buyers and owners with seasonally variable incomes would show the most interest in the skip option, his first closed loan was made to a woman in a different category: someone worried about potentially rocky economic times ahead. She sells vitamins to a major retailer in bankruptcy proceedings, Vinciguerra said, "so she has an understandable concern that she might face a month or two of income breaks" during 2003.
Vijay Lala, Countrywide's senior vice president for product development, said his company plans to market to borrowers nervous about their abilities to keep their payments current in a worrisome economy, and to anyone whose monthly income rises and falls seasonally.
"We have done a lot of research" on consumers' underlying fears about taking on large mortgage debts, Lala said.
"We want to be able to reach out to borrowers who are afraid to make the leap."
Fannie Mae officials stress that although the "payment power" concept is already offered by some lenders, it is still very much an experiment. Although participating lenders assume it will become a standard Fannie Mae product nationwide, Fannie Mae does not want to commit to a specific timetable.
How to get one of these test mortgages for yourself? Watch for marketing campaigns in the months ahead. The loans may carry different brand names, but they will all do the same thing: Let you skip monthly payments whenever you really need to.
Kenneth R. Harney's e-mail address is kharney@winstarmail.com |
