Zero-interest-rate mortgages, an experiment being tried by a handful of developers, will be offered by more local builders soon because investor backing for the idea is being made available here.
The Kissell Co., one of the nation's largest mortgage companies, has started a new program to issue zero-rate mortgages to home buyers when the builder pays for this type of financing.
With a zero-interest-rate mortgage, the buyer makes a large down payment, one-third of the sales price, and then pays off the rest of the principal in equal monthly payments over five years. There is no interest charge, and the buyer owns the home outright after five years.
The cost to the builder for the Kissell financing would be 13 to 14 points, or about $10,000 on a $75,000 mortgage, said Kissell Co. branch manager James Capps. This is comparable to what a builder might pay for a 13 percent VA mortgage now, he added.
So far three area builders have signed up for the program--Sequoia, Kettler Forlines and the Milton Co.--and another 10 have indicated they plan to, Capps said. These builders will continue to offer other kinds of financing, as well.
Before the mortgage banker got involved, three projects in this area offered zero-interest-rate financing to buyers. But in each case the developer has had to hold the note--in other words, to be the lender--which is something a builder or developer normally does not want to do.
Under the Kissell Co.'s program, which the company believes to be the first of its kind in this area, Kissell provides the money and becomes the lender, so the builder gets all the cash from the sale up front. In addition to the cost on each mortgage, the builder pays a one percent fee for a one-year commitment for a certain amount of funds.
In turn, Kissell has the backing of a large California commercial bank that will buy the mortgages once they are made, Capps said. He declined to name the investor bank.
George Middleton, director of sales and marketing for Sequoia, said the cost of the Kissell plan is comparable to that for other kinds of financing that builders are turning to now, including buydowns or subsidized loans. Builders have to increase their prices to take into account the cost of all these financing concessions, which are "the single most expensive feature in a home today after lumber and labor," Middleton said.
Sequoia decided to participate in the zero-rate program because "innovation is needed in this industry, and this is one step."
Robert Simmons, director of sales for Kettler Forlines, said that when zero-rate advertisements first appeared he said it first "seemed like a gimmick, but after looking at it, it seemed like a gimmick that might work. . . . I figured it was at least worth testing the waters on."
The projects where the zero-rate mortgages will be available from the first three builders in the program include: Lafayette Village in Annandale, Concord Park in Oakton, and Seminary Park in Alexandria, all by Milton Co.; Woodbrooke in Silver Spring and Woodhirst in Springfield/Burke, both by Kettler Forlines; and Cameron Knoll in Alexandria by Sequoia.
Those builders who introduced the zero-rate idea to the area on their own include The Towers in College Park, The Towers at Cathedral Avenue NW, and the Bay Country community near Chesapeake Bay.
Part of the mortgage payments under the plan are tax deductible as interest, even though no interest is paid, under an "imputed interest" provision in the tax code.
The mechanics of the tax deduction are unclear, however, and tax attorneys differ on how it would be calculated. Some say it would be treated the same way other mortgage interest would be, that is, with it assumed that more interest is paid in the beginning than at the end. Others say the deduction would be a set percentage of each month's payment and would stay the same throughout the five years.
IRS lawyers are in the process of determining how the deduction would be calculated in the case of a zero-rate mortgage, so it is not yet clear if more would be deductible in the early years or not, an IRS spokesman said.