THE TRADITION of buying a house by means of fixed monthly payments over 25 or 30 years may be on the way out. The Federal Home Loan Bank Board is considering a proposal to establish variable-rate mortagages that could be renegotiated every three to five years. If the proposal is adopted -- and it looks as though it will be -- lending institutions will probably switch many of their funds to the new mortgages.
In a renegotiable mortgage, the interest rate would fluctuate with the market. The rate and the monthly payments could change every third or fifth year. Under the proposal, the change couldn't be more than half a percentage point a year and the changes could not total more than five percentage points during the life of the mortgage. For example, an 11 percent mortgage could become an 8 1/2 percent mortgage in its fifth year and a 6 percent mortgage in its tenth year -- if interest rates went down. Or it could go up as high as 16 percent in 10 years if rates went up.
The proposal is sound economically. It would reduce some of the swings in home mortgage rates; lenders are now charging rates somewhat higher than they would if all mortgages were renegotiable because these are balancing out the low-interest mortgages they hold in their portfolios. The proposal would also relieve the lending insitutions' problem of having to guess what future rates will be when they set current rates.
Among homeowners, there would be losers as well as winners. If these mortgages had been in vogue 20 years ago, those lucky people who have 6 percent (or lower) mortgages would not have been so lucky. Their rates would have been adjusted upward by now. On the other hand, those who recently signed up at 10 or 11 or 12 percent could hope for their rates (and pay- ments) to come down if interest rates ever drop.
While the people who preside over the banking world are considering this fundamental change in the way Americans buy houses, they should also consider another: the elimination of "points" from real estate settlement proceedings. Points were created to get around interest limits imposed by federal and state law. Their effect is to increase the actual interest rate above that stated; a $50,000 loan with four points is actually only a $48,000 loan.
Because interest rates are now so high, Congress felt compelled last month to pass legislation temporarily wiping out the effect of state usury laws on most real estate and business loans. That, combined with the introduction of renegotiable mortgages, provides an ideal opportunity for state legislatures as well as the federal government to do away with the whole point system. Shouldn't the move to make the mortgage system somewhat more equitable to lenders by creating fluctuating interest rates be accompanied by a move to make it more equitable to buyers as well?