Portable Mortgages: What are they? How do they work?
Wednesday, February 25th, 2009
Portable Mortgages. Along with Assumable Mortgages, present a lot of confusion as to where they apply and what savings are really available by using them. This article will cover off the portability option, and its restrictions.
First, a portable mortgage is best described as your mortgage as luggage that you carry from property to property. As long as you don’t need larger luggage to outfit a larger home, it works wonderfully. Any deviations from this complicated analogy, and portability doesn’t help too much.
Portability in a mortgage allows you to take your current mortgage, at current rates, and transfer it to another property. So, for example, if you have a condo worth $300,000 and a mortgage of $200,000 and you sell the condo and buy a larger one, you can transfer the mortgage to your new property that you are buying. You will get to preserve the rate, amortization, and term of your mortgage all without paying a penalty to break the term. In times of rising rates, this is a great option as you get to preserve your old lower rate without penalty.
However, if you are buying a larger or more expensive property, and require a larger mortgage, then portability’s benefits become murky. For example, if you “port” your mortgage to your new home, but it is $500,000 you would be short $100,000 from the sale of your old home. Where does this $100,000 come from? Either you have to have it in CASH (savings of some sort) or you have to borrow it.
Here is where things get confusing. If you are paying 3.75% on your old $200,000 mortgage, and you need another $100,000 but rates have risen to 4.75%, then what rate are you paying?
The answer: it depends on your lender.
Some lenders (not many anymore) allow you to do a “blend and increase” whereby you get the new dollars at the current rates, but keep your old dollars at the old rates. This results in some “blended” rate in between the two. Knowing which lenders allow this and which don’t is difficult and an ever-changing piece of information that you will require a mortgage broker to assist you with.
If your lender allows blends and increases, then you are fine, right? Maybe not.
There is a further complication: what is the amortization length of your mortgage left? If, for example, you originally took a 25 year term, and 2 years into the mortgage you need the additional dollars, that leaves only 23 years amortization. If you can’t “qualify” with your bank for the dollars at the short amortization, then you can’t do the blend and increase. If you can qualify, then you don’t have anything to worry about, but your payments will be higher than they need to be.
A further option is a “blend and extend” whereby you get a blended rate between new and old, and extend your term. In some cases you can even extend your amortization back out to 25 or even 35 years. Most lenders USED TO allow this, but in this tightening market, many are not doing blends and increases, blends, or blend and extends. You have to talk to a qualified mortgage broker to determine who is, and who is not doing ports and blends as discussed.
So how useful is portability? In my opinion it ranks right up there with assumability, which falls in the “nice, but not that great” category of mortgage “frills” that are available.
It is rare that a client can do a straight port without needing more money, less money, or a longer amortization. And with rates falling through the floor, and banks taking a beating everywhere, look for further curtailments of this program as banks try to capture profit through enforcing penalties on their clients.
Assumable Mortgages: What are they? How do they work?
Tuesday, February 24th, 2009
In this time of historically low interest rates, with prime rate constantly descending, many clients have realized that their mortgage is at or below prime rate. Such rates and products are no longer available, and those mortgages that do exist have an intrinsic value to them.
Most mortgages are “assumable” meaning that a qualified purchaser can take it over from a person selling their property. While this is often touted as a great product and great ability with the chance to save lots of money, the difficult practical application of it makes it a “who cares” option, in my opinion.
In this article we are going to review how assumable mortgages work, and when they DO actually help. They ARE helpful, but only in very isolated situations.
what is an assumable mortgage? The mortgage can be transferred from a seller to a buyer and allow the buyer to retain the same terms, rate, and amortization without facing a penalty. Just the ability to avoid a penalty is helpful, but if rates have risen, preserving the original rate can be a huge cost savings for a buyer that makes a particular home financially more attractive than others.
For example, if a house is for sale for $400,000 with a $300,000 mortgage at prime – 0.75% (a product widely available in the past, but not any longer), this yields a net rate of 2.25% (!). Clearly, if there are two houses, with all other things being equal, but one has an assumable mortgage with such a low rate, this mortgage has a value. In fact, in times past, it was not uncommon for clients to sell their house with their mortgage for more than market value! However, we haven’t really seen this for several years because it made no sense to “assume” or “take over” someone’s mortgage. Well, times have changed, and with many mortgages out there at prime – 0.75% (2.25% today) or prime – 0.90% (2.10%) that was offered recently, buyers are looking to assume those mortgages to take advantage of the lower rates. The best rates available today on similar products are at 3.80% to 4.00% meaning there can be a huge savings if you can assume one of the existing mortgages that are no longer available.
In practice, I’ve never seen this work properly, and here is why:
Let’s continue our example above, with a $400,000 selling price and there is a $300,000 mortgage at prime – 0.90% (2.10%). The buyer asks if the mortgage is assumable, and the seller says, “yes.” It sounds like a match made in heaven.
However, the buyer has to assume the mortgage as it sits. Banks won’t give more money out at the old rates, so the buyer will need to have the $100,000 of cash down payment in order to assume the mortgage plus closing costs also in cash. You cannot increase or decrease the amount of the mortgage, or you are breaking the mortgage and will lose the rate an incur a penalty. The fact that the mortgage amount can’t be changed is the single largest impediment to assuming a mortgage.
Second, just because a mortgage is assumable, doesn’t mean you automatically get to assume it. Far from it! You need to QUALIFY for it according to the issuing bank’s guidelines and criteria for credit TODAY – not the rules used to originally qualify for it. This means you have to show sufficient income, credit, and ability to pay the mortgage.
So, assuming a mortgage requires that you don’t change the amount of the mortgage, AND you have to qualify for it. Not very flexible, is it?
Some banks allow you to “blend” the rate. This means that if you need $350,000 but the existing mortgage is $300,000 then you get to keep the rate on the $300,000 but pay today’s rates on the $50,000 of extra money. So, in our example above, you would end up with a rate somewhere between the 2.10% on the $300,000 of assumed mortgage and 3.80% on the $50,000 of extra money.
Again, the banks don’t really WANT you to get the rate, so most of them have suspended blending of rates and either don’t allow it at all, or you have to qualify using “posted” rates (much higher) making it effectively impossible, or at best difficult, to assume the mortgage.
The time where assumable mortgages ARE helpful is in terms of family planning. For example, if two younger people buy a home and need their parents to co-sign for them, and then three years later want to have their parents removed from the mortgage, they can assume it from themselves and their parents. That sounds confusing. However, if part A, B, and C own a property, and A and B want to take C off, it is usually done by A and B assuming the mortgage from A, B, and C. People think of it as a “transfer” but this is usually an assumption in practice.
Another time transfers help is when there is a divorce and one person takes over the property from the other. In these cases, assumability is very helpful.
The bottom line: you still need to “qualify” according to current bank guidelines, and you can’t borrow additional dollars. This makes assumptions a great idea in principle, but difficult on execution.
The only time that assumptions really work out is when the person who is assuming the mortgage doesn’t need additional money, and can qualify for the mortgage just like anyone else.