A creative new mortgage plan that cuts home finance costs by one-third -- and cuts the lender into a share of future resale profits -- is about to get a tryout in the Washington area.
Starting later this month, the Advance Mortgage Corp. will offer some experimental 30-year "appreciation participation loans" to home buyers in the District, suburban Maryland and northern Virginia. Although no rates have been set for the $50,000 to $200,000 loans yet, they will probably be in the 9 to 9 1/2 percent range -- or roughly 30 percent below the 13 to 13 1/2 percent loan rates likely to be prevailing on conventional loans.
To get one, all a prospective home buyer has to do is agree contractually that the mortgage lender will get 33 1/3 percent of the capital gain on the house whenever it's sold or the loan is otherwise paid off.
On a house that appreciated in value by $30,000 over a five-year period, for example, the lender would have to get $10,000 of the profit. On a house that gained nothing in value during the same period -- a statistical rarity in today's market -- the lender would get nothing in return.
The experimental plan, which Advance Mortgage's top Washington official calls "just the beginning of a very large, long-term program," will be limited to about 20 to 30 loans in September. Once the concept catches on, it could involve hundreds of loans locally and thousands across the country.
Al Bryant, Advance's assistant vice president for the Washington metropolitan market, told The Washington Post that final details on the size of mortgages, interest rates and loan-to-value ratios are still being worked out at the corporation's Detroit headquarters. There will be similar experiments in Atlanta, Denver, Phoenix and Tucson.
Advance's parent corporation, the New York investment brokerage firm of Oppenheimer & Co., designed the new shared-equity plan as a way to enable more buyers to qualify for loans.
With home values in the United States rising at an average 13 percent annual rate during the past four years--and even faster than that here in the D.C. area--Oppenheimer securities' specialists believe they can safely bank on continued appreciation in homes.
Their concept makes the lender a co-contributor to a home buyer's monthly mortgage payment on a loan, in exchange for a "piece of the action" later.
The savings from the monthly "sharing" of payments would be dramatic for the home buyer. On a $75,000 loan 30 years at 13 1/2 percent the principal and interest monthly payment on a regular loan would be $859.06. On an "appreciation participation" shared equity loan that would be $630.65.