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October 6, 2003
"I have heard that you can now get a
mortgage that can be moved from one property to another. That sounds like it
would save me a lot of money because my company moves me every 3 or 4 years. Can
you provide details?"
A portable mortgage is one that can be moved
from one home to another. Instead of repaying your mortgage when you move and
taking out a new one on the new home, you transfer the old mortgage to the new
property.
Portable mortgages were a long time coming,
and are currently available from only one lender: E*TRADE Mortgage (www.mortgage.etrade.com).
E*TRADE offers the portability option on 30-year fixed-rate mortgages only, at
an interest rate 3/8% higher than the rate on the identical mortgage without the
option. Borrowers must be purchasing single-family homes as their permanent
residence, refinancing doesn't qualify; they must have squeaky-clean credit; and
they must provide full documentation.
There are two major benefits to the borrower.
One is that it avoids the costs of taking out a new mortgage. This cost must be
set against the cost of paying 3/8% more in rate, which rises the longer the
period between the first purchase and the second. I have done some comparisons,
on the basis of which the break-even period comes out to roughly 4 years on a
$150,000 loan. If you expect that you won't be buying your next house within 4
years, the cost saving on the future mortgage won't cover the cost penalty
imposed by the 3/8% rate premium. The period is a little shorter on a larger
loan, longer on a smaller loan.
But the portable mortgage has another benefit
of considerable value. It allows you to avoid any rise in market interest rates
that occurs between the time you purchase one house and the time you purchase
the next one.
During my lifetime, I have seen mortgage
rates as low as 4% and as high as 18%. When rates are at 6%, there is clearly
much greater potential for rise than for decline. If rates increase, the
portable mortgage protects you, and if they decrease, you can get the benefit by
refinancing. There is no prepayment penalty.
Borrowers who confidently expect to move
within 5 or 6 years and fear that a major spike in rates could seriously crimp
their plans may find the 3/8% rate increment a reasonable insurance premium. It
is less valuable for borrowers who expect to move every 3 years, since the
transfer option can only be used once.
Portability is also less valuable for
borrowers who expect to trade down when they move. Since they will need a
smaller mortgage at that point, the rate protection is not worth as much.
However, E*TRADE will recalculate their payment if the new mortgage is more than
$10,000 smaller than the old one.
Borrowers who trade up cannot increase the
original loan. E*TRADE will give them a second mortgage at the market rate on
first mortgages at that time, but the sum of first and second mortgages cannot
exceed 80% of property value. The borrower will have to pay settlement costs on
the second - the same costs that a new borrower would have to pay at that time.
Borrowers trading up could well find that they would do better getting a second
mortgage from another lender.
Borrowers with the excellent credit needed to
qualify for a portable mortgage should be confident that they can maintain that
record. Borrowers in bankruptcy or behind in their payments cannot exercise the
transfer option. In such a situation, they would have paid the 3/8% rate
increment for nothing.
Copyright Jack Guttentag 2003
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