Friday, May 25, 2007

“Creative financing” – the new way

Not so long ago Bank of America launched its “no fee” loan, which virtually waived mortgage insurance and fees for application, appraisal, loan origination, flood determination and several others. Borrowers are still required to pay some of the costs, and the interest rate is slightly higher than the average, but nevertheless Bank of Americas' terms are very, very competitive and officials claim that theirs is the best deal available.

Competitors, it seems, will follow the example. Washington Mutual now offers a flexible mortgage that allows borrowers to switch between fixed or adjustable rates without refinancing – at little or no cost. Credit unions are joining with a “home loan payment relief” loan, or HLPR. Like an adjustable-rate mortgage, it offers a reduced interest rate for the first two or three years, and then adjusts to a higher rate. Unlike an ARM, however, an HLPR is predictable, because the new rate is determined at the closing of the loan. The new rate equals the national average at the time of the initial loan, so borrowers know exactly what their payments will be long before their rate adjusts.

Eligibility for the new products is usually restricted to low- and moderate-income households and first-time homebuyers. Nevertheless, these products might at last offer the solution to subprime-lending troubles and a sensible way to finance home purchases. No more double-digit profits for lenders, but sound, smart loans that don’t take advantage of borrowers. More than 50 loan providers are out of business already, the rest are learning what it takes to survive a housing downturn.

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