InterestFirst Mortgage Loan

A new type of home mortgage loan makes it possible for more persons with “marginal” qualifications and income to finance a home purchase.

It’s an interest-only loan, at least for the first 15 of its 30-year term. The loan, now approved by Fannie Mae (the nation’s largest buyer of existing mortgages), allows borrowers to pay interest-only for monthly payments for the first 15 years. It then reverts to full interest-principal payments for the remaining 15 years. The new mortgage has been named an InterestFirst loan.

This, of course, means the borrower’s monthly payments are substantially lower than with a conventional 30-year loan for the first half of the term. And that, in turn, makes it easier to qualify for and afford the loan.

Keep in mind that for the first 15 years the borrower-homeowner is not building any equity by reducing the loan balance. There is no reduction. But the owner will benefit from equity build-up from the property’s appreciation (increasing) in value. This loan is most attractive to persons who can’t quite afford to make payments on a conventional mortgage, but can handle these lower payments. And they rationalize that by the end of the initial 15 years they will be in a strong enough financial position to afford the larger payments.

Of course, in most cases homeowners don’t keep their home or loan for even the first 15 years. Nationally, the average time to own and live in a home is about seven years. And, in many cases, mortgage loans are refinanced one or more times while the borrower lives in the same house.

To compare payments of this new loan with a conventional 30-year mortgage, the payments for an InterestFirst $200,000 loan at today’s prevailing interest rate would be about $1,229 per month. Whereas, payments for a conventional loan of the same amount would be $1,347 per month. This results in a saving of $118 per month.

Some borrowers plan to use the saved money to pay other household expenses, build a special fund for a child’s education, or a variety of other personal uses.

Keep in mind that after the first 15-year period, the monthly payments jump substantially. In the above example, it rises to $1,840. But at that point (if you still have the loan after 15 years) you could refinance the mortgage. Or, if your income is sufficiently higher by that time, you might find it’s to your advantage to keep the loan, continuing to pay the higher payments.

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The current trend in qualifying individuals for a home mortgage loan is to relax requirements and make them more flexible.

A major purchaser of existing mortgages recently announced they will not always require a full appraisal of a home before accepting. A quick and much less expensive check of computerized data will sufficiently establish current market value in some cases, they reason – thus saving time and money for homebuyers and those refinancing their home.

Now, Fannie Mae is studying a plan that will substantially cut the amount of credit information needed by a lender to qualify a person for a mortgage loan. After undergoing a test period, the plan is expected to be implemented this fall.

Up to this point, most lenders checked the credit history of loan applicants with the three major national credit bureaus – Equifax, Experian and Trans Union. The new plan would narrow that search down to only one of those bureaus. Again, it would save time and money for consumers.

Like any change in the home buying process, there are advocates and critics of the new practices. Appraisers obviously don’t like the idea of mortgage lenders replacing their services with computer checks. And the credit industry is fighting the currently proposed Fannie Mae move.

Credit industry executives say there is very good reason for lenders to check all three bureaus when qualifying a loan applicant. Each of those bureaus receive somewhat different credit input on each individual, and come up with a different “credit score.” To obtain a realistic perspective on each person’s capability to repay a loan, a report from all three bureaus is needed.

Fannie Mae feels there is not that much difference and the three reports in most cases are not needed.

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In a report recently released by the Mortgage Bankers Association, it was determined that more than 86 percent of “online consumers” have used the Internet to look for a house or shop for a home loan, either for purchasing or refinancing a home.

“The Internet is a very important tool in the home buying process, both in terms of finding a home and shopping for a mortgage loan,” said Douglas Duncan, senior staff vice president of MBA. “The results of this survey show that if they don’t already have a presence online, lenders need to be considering an Internet strategy to attract and service borrowers.”

The survey was conducted for MBA by Greenfield Online, a research group. Other findings revealed in the survey: About 95 percent of those refinancing a loan used the Internet for some part of the mortgage process. And 71 percent of borrowers using the Internet considered more than one lender.

The survey report also indicated that 28 percent of persons refinancing a mortgage used the Internet. And 54 percent of those shopping for a new mortgage loan used the Internet to find a lender or broker, if they didn’t receive a recommendation for one from another source.

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Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends. It’s titled “Open House” in most newspapers, and carries his byline as James M. Woodard. He is also a professional storyteller with a pictorial Web site at:

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