Two starkly different types of mortgage financing are jumping to the forefront as lenders, consumers and the global capital markets cope with the Persian Gulf war.
Both types of loans carry marked-down, concessionary rates at competitive lending institutions. And both allow borrowers to hedge their bets -- to lock in an interest rate that looks favorable in today's marketplace and could look outstanding in six months if rates rise because of the fighting.
The hedge-your-bet feature comes from the relatively short terms of the loans. If fixed rates fall sharply in a recession, you get a chance to opt out, penalty-free, somewhere along the way.
The first category of "war mortgages" are "really the sleeper product of the new year," in the words of Keith Gumbinger, an analyst whose firm surveys more than 2,000 banks, savings and loans, and other lenders nationwide every week.
The surprise is that these mortgage loans are deeply discounted one-year adjustable notes whose terms are structured to basically guarantee you a minimum of two, maybe three, years of below-market rates, no matter what happens in the Middle East.
Gumbinger, vice president of the rate-tracking firm of HSH Associates, says dozens of aggressive lenders have begun to push adjustables at 6.5 percent to 6.66 percent first-year starting rates. Unlike many "teaser" rates of the 1980s, the second and third years are protected by annual rate caps, usually 2 percent.
A war-worried borrower who has taken out a loan this week at 6.5 percent is guaranteed that at the worst he or she is going to be readjusted to 8.5 percent in January 1992. A similar two-point cap would apply the next year as well.
But "the more likely scenario," said Gumbinger, "is that a year from now we could be in a recessionary economy, and rates might actually be lower than today's."
Indexed to the one-year Treasury bills, the marked-down adjustables "might not even adjust up the full two points," he predicted. In other words, you might go from 6.5 percent to 8 percent -- allowing you to retain what's probably the cheapest home financing in town.
The first-year savings? On a $150,000 mortgage, borrowers pay $948 in principal and interest on a 6.5 percent loan, $1,317 on a conventional 30-year fixed rate. The $369-per-month difference produces a $4,428 net savings in the first year alone.
An 8.5 percent maximum rate the second year would mean principal and interest at $1,153.50 a month. The $163.50 per-month savings versus the 10 percent loan would yield $1,962 net savings by January 1993. Total two-year extra money in your pocket: $6,390.
As with any adjustable, you can bail out of the loan at any time. A key point for shoppers, said Gumbinger: Make sure in writing that the two-point rate cap applies to the second year. Some lenders, he warns, still use the old teaser-rate bait: You sign up at 6.5, but the following year your rate bounces up to 10 percent or more.
The second broad category of wartime "smart" mortgages were the fixed-rate product-of-the-year for 1990. These are five- and seven-year balloon mortgages that allow conversion to 25- or 23-year loans instead of the mandatory payoff. Most balloon loans require payment in full at the end of the initial term.
Known in the trade as 5-25s and 7-23s, they are the lowest-priced fixed-rate mortgages in most markets, and provide a safe haven for borrowers worried about global economic shocks. Typical rates nationwide are in the 8.5 percent (plus two points) for 5-25s and 8.75 percent (plus two to three points) for 7-23s. A point equals 1 percent of the mortgage amount. These intermediate-term cut-rate loans are proving particularly popular with refinancers stuck with fixed or adjustable mortgages at 10.25 percent and up.
Before you sign up for either a 6.5 percent adjustable or an 8.5 percent balloon, keep these additional shopping hints in mind:
Any type of adjustable has an ultimate down side compared with a fixed-rate loan: The worst-case maximum rate. Check carefully at your initial contact with the lender. The most competitive 6.5 percent to 6.75 percent war-time loans carry maximum rates in the upper 13 percent to mid-14 percent range. But others will take you into the 15 percent to 16 percent stratosphere.
Balloon loans, even those with convertibility features, do require a course correction to the then-prevailing market rate five or seven years down the road. If you fear mortgage rates in the teens later in the 1990s, maybe an old-fashioned, 30-year, sleep-at-night, fixed-rate 10 percent loan is just fine for you.