Payment
Power
A first step for flexible real estate loans
I’m surprise that you have never written
about fannies Mae's new payment power program.
It allows borrowers to skip payments; an option
you have said was badly needed.I have indeed
lamented the lack of payment flexibility in
mortgages on many occasions. The payment power
program (PPP), however, is a poor first step
toward flexibility. I am not sure whether it
will advance the cause or retard it.The PPP
allows a borrower to skip up to tow mortgage
payments in any 12-month period, and up to 10
over the life of loan. When a payment is skipped,
the amount is added to the balance and a new
(slightly higher) payment is calculated over
the period remaining to term. In effect, the
lender is making an additional loan, equal to
the payment, at the original loan rate of Florida
real estate.
This would be a nice option for real estate
investment to have if it were free, but in fact
it is very costly. Lender charge both an upfront
fee and a usage fee - some charge a high upfront
fee and low usage fee and others do the opposite.I
would look for the lowest upfront fee myself,
because I wouldn't expect to use the feature
except in an emergency.One of the lenders offering
PPP is Indy Mac, which charges an upfront fee
of only an eight of 1 percent of the loan. Its
usage fees, however, are on the high side, ranging
from $225 to $335, depending on the loan balance.
As an example, the monthly payment on a 6 percent
loan for $166,792 would be $1,000 and the usage
fee (until the balance fell to $120,000) would
be $29.5 percent to borrow $1,000 at 6 percent!
Paying $295 is better than becoming delinquent,
but you would be far better off drawing on a
home- equity line of credit (HELOC) if you have
one, so long as you have unused equity in your
home your credit remains good, you can always
get one. Just don't wait so long that you become
delinquent before the HELOC
is approved. Even better is having free insurance
coverage for involuntary unemployment and disability,
which you have now if you are paying for mortgage
insurance and the carrier is MGIC.Under MGIC
mortgage Payment Protection Plan, within the
first five years of the loan,MGIC will make
your monthly payment unto $2000 a month if you
lose your job or become disabled for more than
30 days. The limit is nine monthly draws for
a maximum payout of $18,000.Anyone covered by
this plan would be foolish to pay anything at
all for a Payment Power loan.
The premise underlying Payment Power is that
the best way to provide a source of funds that
a borrower can tap in an emergency is to allow
him/her to borrow these funds, at very high
cost. My view of real estate investment is that
a truly flexible mortgage would provide a far
better source of funds --one that borrowers
generate them-selves, by making larger than
scheduled payments. If you pay more this month,
you should be able to pay less next month. This
type of mortgage would base the borrower's payment
obligation on the loan balance. A schedule of
required balances, declining month by month
over the life of the loan, would be part of
the contract.
For both Buying and selling purpose,If the borrower
made all the scheduled investments, his/her
balances month by month would correspond exactly
to the required balances. But if he /she paid
more in some months, his/her actual balance
would fall below the required balance, providing
a "reserved account" that he/she could
draw on by paying less later on.
Interestingly, the underwriting buying and selling
requirements for many existing loan programs
require borrower to demonstrate that they have
a cash reserve equal to several months of payments.
But once the loan is invested, the borrower
is not permitted to build such a reserve by
making payments in excess of the scheduled payments.
That makes no sense .It also makes any sense
that borrower who prepays a chunk of the ire
mortgage balance can't reduce the real estate
investments instead of shortening the term.
The fact is that our current mortgage was not
designed to facilitate mortgage management by
borrowers. It was designed to facilitate service
to lenders. This had a rationale when servicing
was a manual procedure by guys with quill pens
and green eyeshades, but it has no rationale
today.
