- The Washington Times - Thursday, August 26, 2004

Thanks to ongoing competition in the mortgage industry, lenders are continuing to offer interesting products to attract customers. Today, I’d like to describe a 100 percent financing package that came out this summer.

Twenty years ago, the closest thing you could find to 100 percent mortgage financing was a Veterans Administration loan, for which only military personnel were eligible. For civilians, there’s the FHA loan, guaranteed by the Federal Housing Administration. FHA loans allow 97 percent financing.

As time went by, lenders began offering other 100 percent loans. The problem is that if you wanted a full financing package, you had to be prepared to pay for it. In exchange for offering a loan secured to a property with no equity, lenders would jack up the interest rate and fees.

This relatively new product is available from most area mortgage brokers: The 80-20 purchase-refinance package. The program allows 100 percent financing for either purchase or cash-out refinance by splitting the loan into two trusts: an 80 percent first trust and a 20 percent second trust. The unusual thing about this deal is that it is offered at competitive market rates.

The first trust is available on most standard mortgage products, including 30-year fixed, 15-year fixed, and adjustable rates with initial fixed periods of 10, seven and five years.

The second trust is tied to the prime rate and is equal to prime plus 1 percent. With the prime rate at 4.50 percent, the second-trust rate would be 5.50 percent — not bad for a second trust secured to property with no equity.

The first-trust rates are just as good. At the time of this writing, for example, you could lock in a 30-year fixed rate as low as 6 percent with no points. A 5/1 ARM, which carries a fixed rate for the first five years, is as low as 5 percent. I’m telling you, this isn’t bad for 100percent financing.

The other unusual feature of this program is that it allows cash-out refinancing. Before the emergence of this program, you’d be paying an interest rate in the double digits to pull out 100 percent of the equity in your home.

So what’s the catch? There is none, except you can expect relatively stringent underwriting. Obviously, you must have a very good credit history and you should be able to show that you have some money saved up, either in the bank or in a retirement plan.

Other than that, the program welcomes first-time home buyers and refinancers seeking to tap into their equity or lower their rate.

Jumbo loans are welcome as well, because total financing is allowed up to a whopping $750,000.

I like to write about interesting and innovative new products, and cheap, 100 percent money is certainly interesting and innovative — but it’s not for everyone. Taking out a 100 percent loan has its risks. For example, you wouldn’t want to take out such a loan if you plan on selling in a year or so. If property values should fall, you would end up upside down in your house mortgage.

Another example: It would be clearly unwise to cash out all of your home equity and spend it on a lavish vacation.

It’s a great product, but make sure it’s right for you before you dive in.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]).


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