E*Trade, the online bank, has introduced a home loan for the ultimate forward-planner: a portable mortgage that can be taken out at today's historically low interest rates and applied to a future home purchase when, one assumes, rates would be significantly higher.
"It's for those who see today's rates as a one in a 40-year opportunity," says Rob Bernabe, head of retail mortgage lending at E*Trade Financial, which is the third-largest online mortgage lender in the country. "If rates go up, it won't be as attractive an opportunity."
But if rates do go up, buyers may wish they'd grabbed just such a mortgage when they go to buy their next home, says John Burns, an Irvine, Calif.-based real estate consultant who floated the idea earlier this year in one of his online newsletters. "I was doing some analysis on the correlation between mortgage rates and sales volumes and realized just how disastrous a significant rise in mortgage rates would be to the housing market, both resale and new," he says.
Obviously a few prospective buyers are thinking the same way about their future budgets. "The phone has been ringing off the hook," according to Bernabe, who says the company locked in customers during the first week it offered the "mortgage on the move." E*Trade did $2.9 billion in mortgage originations for the quarter ending June 30, 2003.
How does it work? When buyers go to purchase their next home, they apply the remaining debt on their portable mortgage to their new home and take out a second mortgage for the remainder at current rates. Overall, their blended cost of financing is lower than if they had simply paid off their first home loan and taken out an entirely new mortgage on their new house.
There are some limitations. Since there's currently no secondary market for these mortgages, E*Trade won't be selling them to Fannie Mae or Freddie Mac; instead, the online bank plans to hold the mortgages in its own portfolio. And they do cost consumers a little more--3/8 point over the jumbo rate, although E*Trade's base rates are more than competitive with rates published in Freddie Mac's weekly survey.