The NBD Mortgage Co. of Virginia is now making short-term mortgages available below the current market rates of 9 per cent.
Under this plan, monthly payments are calculated on a 25-or 30-year basis, although the loan is actually made for only five years.
At the end of that period, a second five-year loan is guaranteed, provided the borrower has met all the payments. The second loan is made at the current market rate on a 25-year amortization schedule. In addition, the borrower must pay the costs of another title search and survey to assure that the property had had no liens or easements in the intervening years.
The short-term mortgage is tailored for upwardly mobile homeowners, those who can expect to move frequently as they advance in their careers. In Detroit, NBD's parent company, the National Bank of Detroit, has been doing more than half of its recent business in short-term mortgage.
In the Washington area, NBD is offering short term mortgages at 8.25 per cent up to $125,000 with a 30 per cent downpayment on a 25-year schedule. The rate rises to 8.5 per cent for $100,000 with 25 per cent down on a 30-year schedule; 8.75 per cent for $75,000 with 10 per cent down. There is no prepayment penalty at any time during either five-year load.
If the homeowner does not wish to renew after five years, he may apply for a conventional mortgage loan from NBD or any other institution. The five-year loan is renewable only once. So after 10 years, the borrower must refinance.
Obviously the homeowner who benefits from the lower interest rate during the first five years risks having that advantage wiped out if he renews at a time when market rates are higher.
The mortgage company, on the other hand, stands to benefit because its funds are not tied up for 20 or 30 years at low yields while market rates rise.