Your Mortgage : Buyers Get In the Swing With 2-Step Loan : Financing: Program is cross between fixed- and adjustable-rate loans. It starts with below-market rate, is adjusted after seven years.
Thousands of home buyers across the nation are taking a big step--make that two steps--when it comes to taking out a mortgage.
“Our two-step program is doing better than any of us expected,” said Dennis Godfrey of the Federal National Mortgage Assn., which launched the new loan program six months ago. “Lenders are signing up all across the country to offer them.”
A two-step mortgage is a cross between a fixed-rate and adjustable-rate loan.
The loan starts out with a below-market fixed rate. The Lender’s Center in Thousand Oaks, for example, is charging about 9.6% on its two-step mortgages compared to 10 1/4% for its conventional fixed-rate loans.
The interest rate on the two-step mortgage is adjusted only once--at the end of seven years. The rate can go up or down depending on where overall interest rates have gone, but can’t be raised more than six points above the original interest rate.
For example, if you got a 9.6% rate when you first took out the loan, it couldn’t rise above 15.6% when it’s adjusted seven years from now.
“The two-step loans really give you the best that both fixed-rate loans and ARMs have to offer,” said Tom Criser of the Lender’s Center, where about 25% of the loans made today are two-step mortgages.
“You get to lock in a below-market interest rate for seven years, and you only have to worry about having the rate adjusted once. And if you move before the seven years are up, you’ll enjoy that below-market rate and never even see a readjustment.”
Scott McAfee, an executive vice president with Security Pacific Bank, sees other advantages to the two-step loans.
“You basically get seven years to watch interest rates,” McAfee said. “If rates drop a point or two below what you’re paying on your two-step loan, you can refinance with a conventional mortgage to save money and avoid any future adjustment.
“On the other hand, if rates are lower seven years from now, you’ll automatically get the lower rate and won’t incur any refinancing fees.”
McAfee also notes that two-step mortgages are a bit easier to get because of their lower up-front rate.
For example, many lenders would require a couple seeking a $140,000 conventional loan at 10 1/2% to earn $56,000 annually. But if they applied for a two-step loan at a 10% rate, they could earn $2,000 a year less and still qualify.
Not all lenders are keen on the two-step plan. Officials at California Federal Bank initially planned to sign up for the program when it was unveiled earlier this year, but changed their minds when they saw how the program would actually work.
“The way it was set up, the two-step loan we could offer would only be one-eighth of a point or so below the rate on our conventional 30-year loans,” said Mark Ulmer, a California Fed senior vice president.
“We didn’t think that people would accept the uncertainty of a loan that was going to be adjusted seven years from now just to save $10 or $12 on their monthly payments.”
As an alternative to the two-step, California Federal and several other lenders offer seven-year “balloon” mortgages. Payments are made based on a 30-year schedule, but the outstanding balance must be paid off in one big balloon payment seven years from now.
California Federal is offering a 9 7/8% fixed rate on these balloon loans, below the 10 1/4% rate on its conventional fixed-rate loans.
You’ll save money if you take out one of the loans and move within seven years, but you’ll have to refinance at market rates if you decide to stay put when the balloon payment is due.
Are you behind on your mortgage payments? If you are, you’ve got plenty of company.
A new report by the Mortgage Bankers Assn. of America indicates that more than 1.8 million of the 43.2 million mortgage loans in existence today are 30 or more days past due.
“Those numbers might sound kind of high, but delinquencies are actually at an 11-year low,” said Richard W. Peach, an MBA economist. “Delinquencies and forecloses are much lower now than they were just a few years ago.”
Peach said much of the improvement stems from the rebounding economy in the Oil Patch states, such as Texas and Oklahoma. Fewer foreclosures are occuring there, now that jobs are being created again and prices are starting to rise.
The findings are based on a survey of more than 14.5 million loans made by 400 mortgage bankers, savings and loan associations, commercial banks and life-insurance companies.
Although the survey was conducted in the second quarter of this year, Peach said the numbers probably haven’t changed much because they aren’t very volatile.
Assuming that’s the case, here’s what we know about the financial health of homeowners today:
* About 1.28 million borrowers are 30 days behind on their monthly payments. Another 276,000 are 60 days in arrears.
* Roughly 281,000 borrowers are either facing foreclosure or are dangerously close because they’re 90 or more days past due.
* Lenders across the United States now hold about 402,000 homes that they gained through foreclosure. Action against another 130,000 or so troubled borrowers will be initiated in the three-month period that ends Sept. 30.
All told, 4.52% of the loans that the MBA surveyed were past-due. But a whopping 6.58% of all FHA loans were past-due, while 6.24% of VA-insured loans were late.
WHERE TO FIND ‘TWO-STEP’ MORTGAGES
Nearly 50 lenders now offer “two-step” mortgages in California and other western states. You can find the one nearest you in the white pages of the local phone book.
First Nationwide Savings
American City Mortgage Corp.
Beverly Hills Securities Co.
Cal-Bay Mortgage Corp.
Capital Pacific Mortgage Co.
Capitol Commerce Mortgage Co.
Coast Funding Corp.
Commercial Center Bank
Community West Mortgage Inc.
Countrywide Funding Corp.
Directors Mortgage Loan Corp.
Far West Residential Services
First California Mortgage Co.
First National Mortgage Co.
First State Mortgage (also called DeWitt Mortgage)
Fullerton Mortgage & Escrow Co.
Glendale Federal
Guild Mortgage Co.
Home Savings of America
Inland Savings & Loan Assn.
Lowell Smith Evers Inc.
Medallion Mortgage Co.
Mercury Mortgage Service Corp.
Midwest Pacific Financial Inc.
Mineral King National Bank
Mission Hills Mortgage Corp.
Mortgage Capital Group
Pacific Central Mortgage
Provident Mortgage Corp. of Central California
RNG Mortgage Service
Security Pacific National Bank
South Pacific Financial Corp.
Standard Pacific Savings
Sun West Mortgage Co.
United California Savings Bank
Visalia Community Bank
Western Bank Mortgage Co.
Western Cities Mortgage Corp.
Western Sunrise Savings
SOURCE: Federal National Mortgage Assn.
Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles 90053. Questions cannot be answered individually.
