Mortgage makers have always been a creative lot. But these days, credit unions seem to have supplanted traditional lenders as the most inventive.
Banks and mortgage companies are pretty much operating with one hand tied behind their back while they wait for regulators to lay down the law under the latest -- and much more restrictive -- legislation. But not credit unions, says Ed Roberts of the trade publication Credit Union Journal.
These not-for-profit institutions, which are owned and controlled by their members, had "much lower deficiency ratios" than banks during the mortgage meltdown, says Roberts. So they are "much more willing to experiment."
One of the most intriguing new products is a five-year, fixed-rate mortgage being offered by the National Institutes of Health Federal Credit Union, which serves biomedical and health-care professionals in Maryland, Virginia, West Virginia and the District of Columbia.
"We call it our 'Goodbye Mortgage' because it's perfect for our baby boomer members who want to get out of debt before they retire," says NIHFCU President Juli Anne Callis.
Say you're nearing the point when you're ready to slow down and enjoy the fruits of your labor, but you have a 10- or 12-year "tail" left on your current home loan. The loan is not throwing off the interest write-offs it used to, but you don't have enough cash lying around to pay it off.
Consider refinancing into a five-year, "see-ya" loan like the one offered by the NIH credit union. At today's record low interest rates, you might be able to cut the remaining term in half while paying no more than you were under your original loan.
Even if the payment is somewhat higher, Callis says, her members are going for it. They are at the stage in their lives when they have the financial wherewithal to pay a little more each month in order to be out of debt sooner rather than later.
"'How can we get out of debt by the time we retire?' is a constant theme we hear from our members," Callis says.
But the Goodbye Mortgage doesn't appeal only to empty nesters. Parents who want to dump their mortgage debt by the time their children reach college age also see the value of refinancing into a five-year loan.
Younger buyers who don't want to load up on debt are giving the loan a hard look, Callis says. And there's interest, too, among folks who want to pay off their loan on their primary residence sooner so they can buy a vacation home.
Shorter-term loans have always been available in the mortgage supermarket. While most people know about 15-year loans, few realize that lenders will sometimes go as short as 10 or even eight years. But five-year loans? They're practically unheard of.
What makes a five-year loan work, of course, is today's rock-bottom rates. Say you are on the back end of a 30-year, fixed-rate loan you took out 20 years ago at 7 percent. If you borrowed $200,000, your payment is $1,330.60, and your current balance is $144,602.
Roll that into a five-year loan at 2.5 percent and your payment would jump $703, to $2,033.88. But now you have a lot more discretionary income than you did 20 years ago, and if you throw that against your mortgage, you'd be debt-free in half the time.
"As long as you are in a position where the higher monthly payment is not going to affect your lifestyle, the Goodbye Mortgage works really well," says Mark Lawson, a NIHFCU loan officer.
Other credit unions are offering five-year adjustable-rate mortgages -- but with a twist. Whereas the typical five-year ARM resets annually after the initial five-year fixed period, the 5-5 adjustables offered by Affinity Federal in New Jersey and Alliance Credit Union in San Jose, Calif., and Wilmington, N.C., are 30-year loans that adjust only after every fifth year.
"For the past four years or so, it's been all about the 30-year fixed-rate mortgage. Adjustables had fallen off the map," says Jim Delyea of Alliance, which serves as a credit union for about 200 companies. "So we thought it was time to reintroduce it. It's almost like a new concept, it's been off the table for so long."
Both institutions are targeting their 5-5 ARM toward buyers who know they won't be staying in their homes for long periods, whose jobs dictate that they be able to move every seven to 10 years. It's more secure than a typical 5-1 ARM, says Delyea.
"You'll enjoy five years of low, locked-in payments, then an adjustment only every five years after that," the Alliance vice president says. "It's the perfect mix."
ARMs don't have a particularly great reputation, largely because rates can fluctuate so widely that borrowers could be hit with unexpectedly higher payments. But with a 5-5 ARM, even borrowers with longer-term horizons can anticipate what is coming and budget for it, says Affinity's Elizabeth McLaughlin.
At Affinity, New Jersey's largest credit union serving more than 2,000 businesses and organizations, the 5-5 ARM comes with a 3 percentage point cap at the first adjustment and a 2-point cap on subsequent resets. Over the life of the loan, the rate can rise by no more than 6 points.
These built-in protections are even better with Alliance's loan, which has 2 percentage point caps on each adjustment and a 5-point maximum over the 30-year term.
And, of course, if market rates should fall sometime over the life of the 5-5 ARM, there's always the possibility your rate could slide right along with them.
The product "is a good example of the financial industry finding better ways to execute a worthwhile concept rather than simply tossing it out entirely because there were problems associated with it," Alliance says on its website.
"Consumers did have problems with ARMs, but it didn't make sense to lock everyone into fixed-rate mortgages when ARMs could benefit a lot of homebuyers if they were merely structured a little differently to protect against high risks and extremes."