Mortgages: Now, You Can Get The Best Of Both Worlds

Mention creative financing to most mortgage lenders, and you're likely to get a blank stare. That's what New York investment banker Christopher Hogg found when he went shopping this fall for a jumbo mortgage to buy his dream house on Long Island. But after being turned down by several institutions, he found one, Emigrant Savings Bank, that was willing to offer him a "designer mortgage" that met his requirements.

Hogg figured that interest rates would probably remain stable for two to three years, then rise steadily. By that time, he could pay off a large chunk of his mortgage. So he wanted a deal that would take advantage of low adjustable rates, lock in a low fixed rate in case rates rise, and cut his monthly payment if he pays off part of the loan.

The result was two mortgages--a fixed and an adjustable--wrapped neatly into a single "hybrid" loan for something "over $500,000." Sixty percent of the total is a 15-year, 6.75% fixed-rate mortgage, and the remainder is a 30-year adjustable bearing a first-year rate of 37/8%. Assuming a $500,000 loan, rates on the adjustable portion of 57/8% in year two, and 77/8% in years three through five, the net savings in monthly payments over five years is nearly $30,000. Even though Hogg will owe more at the end of five years than if he had taken a single 15-year fixed mortgage, he will have achieved his goal of gaining flexibility to put his cash to other uses.

A small--though growing--number of lenders is offering similar kinds of flexible mortgages. One reason they aren't more common is that lenders structure loans to be sold in the secondary market vs. retaining them in their portfolios. Lend- ers also consider custom deals too time-consuming.

Still, they could catch on. Dime Savings Bank of New York has granted borrowers who expect their income to increase a mortgage calling for most of the interest to be paid in the later rather than early years of the loan. While the Dime hasn't extended any hybrid mortgages, Senior Vice-President David Totaro says the bank would consider doing so. Merrill Lynch Credit and The Boston Company offer combination fixed rate with a home-equity line of credit that is essentially a one-year adjustable.

Emigrant offers designer options to any borrower who qualifies for a conventional mortgage, though they make the most sense for someone who needs a large loan. The bank has even put together three-tier mortgages in which 25% has been fixed for 15 years, 50% is fixed for 30, and 25% is adjustable. Sometimes, with bankers, ask and you shall receive.