From Texas to California to Boston, the word is spreading fast. This could be the year of the convertible: the adjustable, cut-rate, dual-capped convertible home mortgage that costs no more than a regular hard-top but provides all-season protection.
If you're a new or resale home buyer or refinancer this spring, there might be a 1985-model convertible rolling your way. Local lenders and builders across the country are ordering them at a record pace -- an estimated $100 million worth of mortgages the first week of April alone.
Here's what the fuss is all about:
* Fixed-rate mortgage quotes have climbed to 13 1/2 percent in many markets, turning off or disqualifying tens of thousands of would-be borrowers. Adjustable-rate loan quotes, by contrast, have fallen slightly the past month, according to federal government data.
* Adjustables have begun attracting back some of the home-buying customers who fled them when fixed rates dipped to 12 1/2 percent last December and January. The key problem consumers perceive with adjustables remains the same: They're scary because no one can be certain where rates will be two or five years from now. Adjustables may be delightful when interest rates are on a downward slope. But they're a pain in the checkbook when rates are heading for the ceiling. What's needed is a way to get off the escalator when rates turn the wrong way -- without incurring the usual substantial costs of refinancing. Enter the souped-up convertible mortgage.
Although home loans that permit conversions from adjustable rates to fixed rates have been available the past two years, none has put together features such as the fast-selling 1985 model. The new convertible works like this:
Let's say you're in the market for a new home and don't feel comfortable with a 13 1/2 percent, fixed-rate mortgage. You sign up instead for a $100,000 adjustable-rate, 30-year loan with the following terms:
* Your down payment can be 5 percent, 10 percent or 20 percent.
* The first-year rate is set at three-eighths of 1 percent over the Treasury's one-year note rate plus a servicing fee to the lender. Your actual payment rate is 10 1/2 percent. That rate can be "bought down" by another 1 percent by a builder or seller who wants to close the sale and will pay the "point."
* The second and all subsequent year's rates are set at a flat 2 3/4 percent over the prevailing Treasury one-year note cost -- or 12 1/2 percent if next year's economy resembles today's.
* The loan carries a 2 percentage point annual-rate increase cap or limit, and a five-year, life-of-the-loan rate-increase limit. (Fifteen and one-half percent would be the highest the mortgage could ever go, in other words, even if Treasury rates ballooned to 22 percent.)
* For no additional fee up front, your adjustable-rate mortgage comes with a guaranteed right of conversion to a long-term fixed-rate. The conversion option normally would come into play at the third, fourth or fifth anniversary dates of the loan, but could also be used on the first or second anniversaries with the lender's permission.
Let's say that by 1988, rates in the long-term market were hovering at 12 percent, but that analysts were worried about increases or rate instability over the horizon.
Rather than gambling with the unknown, you decide to freeze in a fixed rate. Unlike bailing out of a regular adjustable and refinancing into a fixed-rate, your convertible loan would spare you the hassles of title searches, two- to three-point closing fees and dealing with a new lender, a lawyer and paperwork.
Instead you'd pay a one-percentage-point conversion fee. You'd get a 12 1/4 percent fixed-rate mortgage (one-fourth point premium over the Federal National Mortgage Association's quote), with 27 years yet to run. And you could sit back and say goodbye to the uncertainty of your adjustable.
The advantages of convertibles are that they leave the decision-making up to you, they're all deeply discounted up front, and the conversion option is cost-free until you find it advantageous to actually use it. If short-term rates plummeted in future years, for instance, you might stick with your adjustable indefinitely. Or you might not decide to convert until the market was right, in, say, 1990.
Covertibles are attractive enough that they're turning into the mortgage pace-setter of 1985. Fannie Mae, the Federal National Mortgage Association -- whose decision last December to buy convertible adjustables as a standard loan product sparked the current boom -- reports that a whopping 70 percent of its adjustable-loan commitments in March were for convertibles.
A major national mortgage-banking firm, the Virginia-based McLean Financial Corp., says demand for its version of the one-year convertible adjustable -- the 10 1/2 percent loan described in the above example -- is going off the charts.
(For information on sources of cut-rate convertibles in your community, contact either local mortgage bankers or McLean Financial's toll-free hotline, 800-368-3186.)