You've heard of the SAM loan, the GEM loan, the ARM, the PLAM and the RAM. But get ready for the newest--and perhaps the most intriguing--home-buying financing option to appear in several years.
It's called the cut-rate HAM loan, and it's a home-grown product of Nebraska. Before you turn up your nose or sniff at its name, you ought to know the facts. The HAM is a sophisticated financial device aimed squarely at the biggest segment of the home-buying public: consumers who want nonvariable interest rates for guaranteed long terms at the lowest possible interest charges.
The HAM also sells like hotcakes: In the markets where it's been introduced during the past three weeks, it's broken records for application volume. An S&L that had made barely $10 million in conventional loans during the first three months of 1983 wrote more than $3.5 million worth of HAM mortgages in less than 10 days in late March.
If the HAM continues to catch on this spring, a HAM or a version modeled after it by a local lender in your market could finance your next home purchase.
HAM stands for Home Access Mortgage, a trademarked loan vehicle created by American Charter Federal Savings & Loan of Lincoln, Neb., which has $1 billion in assets.
What makes it so intriguing is that it offers discount interest rates on a fixed, long-term schedule--without tying the borrower and lender to unpredictable variable rates in later years, or requiring any form of negative amortization. (Negative amortization, a standard ingredient of discount-rate, variable-loan plans, involves increases in principal debt outstanding on a loan in order to compensate for the low rates. Loan balances actually rise, not fall, during the course of a mortgage--a feature that terrifies many would-be home buyers.)
The HAM mixes four key concepts:
A fixed interest rate, currently 11 1/4 percent, that is nearly two percentage points below rates for comparable long-term loans prevailing in the national secondary market, whether FHA/VA or conventional. The lower rate reduces the family income required to buy a home by thousands of dollars on typical loans, thereby expanding the market for realtors and builders.
No size limitation. Mortgages of $200,000 have been written at 11 1/4 percent, although the average size loan is in the $50,000 to $70,000 range.
Accelerated payoff of the mortgage through higher contributions to principal reduction as the years progress. Although HAMs are written on 30-year terms, they normally are paid off in about 16 years.
The option to refinance or prepay the loan without penalty any time after the fifth year.
Stripped to its essentials, the HAM is an updated variation of the so-called "growing-equity" mortgage, or GEM, pioneered by Wall Street's Merrill Lynch last year. The GEM provides an early payoff and fixed-rate financing schedule, but doesn't offer discounted rates anywhere near as low as 11 1/4 percent.
The HAM loan requires a gradually rising, predetermined series of payments in increments of 4 percent a year. After the fifth year, every dollar of the annual increase goes to reduction of loan principal. In other words, rather than paying interest for 30 years, your payments begin to cut your debt rapidly, and you own your home free and clear in 16 years.
The 4 percent annual increases work out to between $20 and $25 a month during the early years of a typical HAM loan. Bill Watson, executive vice president of American Charter and chief financial designer of the HAM loan concept, says the annual jumps "are intended to be well within the capacity of the borrowers to handle, even if their annual salary increases are as low as 1 percent."
On a $50,000 HAM at 11 1/4 percent, for instance, the first year's scheduled payments would be $485 a month compared with a current 12 percent FHA mortgage payment of $535. In the second year, the HAM would be at $505, and the FHA still $535. Only in the fourth year would the HAM loan's effective interest exceed the FHA's.
By the fifth year, when the HAM payment would be $33 higher than the FHA ($568 versus $535), the HAM borrowers could refinance the loan if they chose, having benefited from the lower payments during the early years. Or, they could hang on for the duration of the HAM's term--another 11 years.
Because the HAM loan would begin paying off principal on a sharply accelerated schedule after the fifth year--unlike the 30-year standard FHA mortgage--the total payments on the $50,000 HAM over its full term would be $128,000, versus $193,000 for the FHA loan.
The Federal National Mortgage Association (Fannie Mae)--the largest investor in home mortgages in the country--is now taking a close look at the HAM concept. If Fannie Mae chooses to buy the idea, HAMs could be available throughout the country.
Lenders can obtain more information on HAMs from American Charter Federal S&L, Box 82459, Lincoln, Neb. 68501.