A type of mortgage loan with a five-year life is gaining popularity in Detroit, according to the National Bank of Detroit, which introduced it last January.
Two thirds of the bank's mortgage applicants are now requesting the five-year contract, said its vice president, William Dwire.
The loan provides for monthly payments based on amortization up to 30 years. At the end of five years, the bank guarantees another five year loan at the then prevailing interest rates, provided the account is not delinquent.
To make the concept attractive, the bank is offering mortgages at 8.25 per cent, or one half percent below the current rate. There are no prepayment penalties. Closing costs are about $50 lower, Dwire explained, because the bank does not have to run an extensive credit check on the applicants.
Obviously, a mortgage loan with a balloon payment due after five years is not for everyone, he said. "We don't encourage people on fixed incomes to apply. It is intended for young professionals who are upwardly mobile."
The bank will lend up to $125,000 for a residential mortgage, he said.
For its part, the bank benefits by not having to invest funds borrowed at (high) short term rates in long-term investments and can adjust the mortgage rate at the end of five years.