By Queena Sook Kim
From The Wall Street Journal Online
July 9, 2003 -- Mortgage rates haven't been this low in roughly 40 years. So wouldn't it be nice for home buyers to lock in today's rate for all home purchases in the future?
So-called "portable" mortgages let borrowers do just that. This new product, offered by E*Trade Mortgage, allows soon-to-be homeowners to transfer the loan -- while hanging on to the earlier rate -- from one home to the next.
One catch: Your rate will be slightly higher than the going rate. The lender says the higher rate reflects the longer life of the loan. Regular 30-year fixed loans are typically paid off in five to seven years when homeowners move or refinance their loans, at which time banks can profit by lending out the money again. E*Trade assumes that home buyers will keep the mortgage for a full 30 years. Such loans aren't available to homeowners looking to refinance.
The online lender began offering portable loans earlier this month in a bid to expand its mortgage business. E*Trade Mortgage originated $6.2 billion in mortgages in 2002, or far less than 1% of the overall $2.5 trillion in U.S. home mortgages taken out last year.
The approval process for a portable loan would be the same as for a typical 30-year fixed, and a traditional 20% down payment is usually required. E*Trade lends mainly to borrowers with high credit ratings.
How does a "portable" loan actually work? Consider Gregory and Gwen Jones. After hearing about E*Trade's "Mortgage on the Move" offer, the Phoenix couple locked in a rate three-eighths of a point more than a regular 30-year fixed loan that day. At first, they weren't sure the higher rate would pay off.
The newlyweds are buying their first house and plan to move back to their native Northwest in three years. Mr. Jones liked the fact that E*Trade doesn't charge fees for the straight transfer of a loan to another property of the same or lesser value. But there are fees if the second property is of greater value, requiring a second mortgage.
If the Joneses move to a costlier home, E*Trade will transfer the remainder of the mortgage to the new house at the same rate. Then the lender will offer the family a second mortgage at the same interest rate as a first mortgage. Fees will be charged for the second mortgage, and homeowners are required to get the loan from E*Trade. That allows the lender to maintain a lien on the house.
E*Trade charges borrowers a set fee of $995, but after including third-party costs like title insurance and tax, the total cost is about $2,190. The estimate doesn't include points paid by borrowers for a lower interest rate.
Mr. Jones said he was comfortable with the arrangement because E*Trade's loan rates are competitive with those at other lenders. On the flip side, if the Joneses were to move to a cheaper house, they could reduce their mortgage without a penalty, while keeping the earlier rate.
Currently, E*Trade is the only lender offering such loans. And others aren't rushing to follow.
Market conditions will dictate how long these portable loans are available, says Robert Bernabe, head of retail-mortgage lending at E*Trade. "We'll stop when rates rise to a certain point and the product isn't attractive to customers."
