portable mortgage

portable mortgage

A new product first offered in 2003 and still relatively rare;it allows a borrower to move a mortgage from property to property as he or she sells and then buys new homes.This saves significant loan and closing fees.Interest rates are somewhat higher than conventional loans, the borrower must have nearly perfect credit, and the savings decrease the longer the time period is between sales.

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Portable Mortgage

A mortgage that can be moved from one property to another.

Ordinarily, you repay your mortgage when you sell your house and take out a new mortgage on the new home you purchase. With a portable mortgage, you transfer the old mortgage to the new property.

An Innovation in 2003: Portable mortgages were talked about for a long time, but did not appear until 2003, when they were introduced by E*TRADE Mortgage. E*TRADE offers the portability option on 30-year fixed-rate mortgages only, at an interest rate 3/8% higher than the rate on the identical mortgage without the option. Borrowers must be purchasing single-family homes as their permanent residence (refinancing doesn't qualify), they must have squeaky-clean credit, and they must provide full documentation.

Benefits to the borrower: There are two. One is that it avoids the costs of taking out a new mortgage. This cost must be set against the cost of paying 3/8% more in rate, which rises the longer the period between the first purchase and the second. The break-even period comes out to roughly four years on a $150,000 loan. If you expect that you won't be buying your next house within four years, the cost saving on the future mortgage won't cover the cost penalty imposed by the 3/8% rate premium. The period is a little shorter on a larger loan, longer on a smaller loan.

The second benefit is that it allows you to avoid any rise in market interest rates that occurs between the time you purchase one
house and the time you purchase the next one. Since World War II, mortgage rates have been as low as 4% and as high as 18%. When rates are about 6%, there is clearly much greater potential for rise than for decline. If rates increase, the portable mortgage protects you, and if they decrease, you can get the benefit by refinancing. There is no prepayment penalty.

Borrowers who confidently expect to move within five or six years and fear that a major spike in rates could seriously crimp their
plans may find the 3/8% rate increment a reasonable insurance premium. It is less valuable for borrowers who expect to move every three years, since the transfer option can only be used once.

Portability is also less valuable for borrowers who expect to trade down when they move. Since they will need a smaller mortgage at that point, the rate protection is not worth as much. However, E*TRADE will recalculate their payment if the new mortgage is more than $10,000 smaller than the old one.

Borrowers who trade up cannot increase the original loan. E*TRADE will give them a second mortgage at the market rate on
first mortgages at that time, but the sum of first and second mortgages cannot exceed 80% of property value. The borrower will have to pay settlement costs on the second—the same costs that a new borrower would have to pay at that time. Borrowers trading up could well find that they would do better getting a second mortgage from another lender.

Borrowers with the excellent credit needed to qualify for a portable mortgage should be confident that they can maintain that record. Borrowers in bankruptcy or behind in their payments cannot exercise the transfer option. In such a situation, they would have paid the 3/8% rate increment for nothing.