The Federal Home Loan Bank Board amended its rules on balloon payments and reverse annuity mortgages yesterday to make them more marketable. Not many of these loans have been made because of the restrictions attached to them.
The maximum amount that can be financed with a balloon mortgage was raised from 60 percent of the house price to 95 percent. The board also eliminated the five-year limit on the life of a balloon mortgage. This type of loan may henceforth be extended up to 40 years.
A balloon mortgage commonly means that only interest is paid over the life of the loan, with the principal due at maturity. Sometimes, however, the loan is partially amortized; that is, some of the principal is paid off along with the interest over the life of the loan.
Under the changes, fixed interest-rate balloon mortgages of either type may be made for as long as 40 years, although partial amortization normally would be expected for a long-term loan.
However, on balloon mortgages that have adjustable interest rates, part of the principal will have to be paid regularly. Interest payments must be adjusted at no more than five-year intervals to meet the 40-year amortization schedule. For example, a 15-year balloon loan, with payments calculated on a 40-year life, could fall to a 50-year schedule if interest rates rise. In such cases, interest payments would be increased to restore the loan to its original 40-year schedule.
In addition, the board liberalized reverse annuity mortgages--loans designed to allow older homeowners in particular to take the accumulated equity out of their residences.
Savings and loans no longer will have to clear their reverse annuity plans with federal regulators. In another change, the board said that lenders henceforth will not be obliged to offer refinancing when the loans mature. This means that if a homeowner who has contracted, for example, to receive $500 a month from a savings and loan for 20 years has not sold his or her house by then, the savings and loan can demand that the homeowner repay the loan.