Make Money On Your MortgagePam Black
For most people, buying a home means seriously depleting your savings. But now there's a way to create a savings from the downpayment. Some mortgage lenders are courting new business with loans that let you sock away most of your downpayment in a fixed annuity, where it earns tax-deferred interest. The advantage: You'll be hedging against falling real estate values and accumulating savings to lower the total cost of your loan by 15% to 20%. "The downpayment is earning interest for you instead of sitting idly in the house," says Van Carter, president of Financial Integration, a Cleveland-based marketer of financial products and creator of the new loan (800 292-6688).
Here's how it works. If you take out a 30-year, 8.5% loan on a $100,000 house, normally you would put down $20,000 and finance $80,000, on which you would make monthly payments of $615. With an asset-integrated mortgage (AIM), which is offered by several mortgage lenders across the country, you would put down only $5,000 and deposit the $15,000 difference in a fixed annuity, which currently pays about 6.25% a year. Your loan would then be $95,000 because you still have to pay the seller the balance. And you would have higher monthly payments of $730. But over time, the annuity can offset your total cost, says Carter. After seven years, you would have paid out only $58,120, as opposed to $71,660 for a conventional loan (table).
Even though your loan is bigger, you also wind up with more equity when you sell your home. If your property value stayed constant, after seven years you would still owe $88,425 with the AIM loan and $74,463 with the conventional loan. That means an equity of $11,575 in the AIM-financed house, vs. $25,537. But when you add in the $23,200 annuity, the AIM loan gives you a total equity of $34,775. Any rise in the value of the house merely sweetens the pie, but the annuity will keep growing even if the house's value declines.
LIMITED LOSS. The principal in the annuity remains collateral against your mortgage until you pay it off or sell the house. Then you have four choices: You can keep the annuity growing; cash it out--only the interest will be taxed; turn it into a stream of monthly income payments over the years; or roll all or part of it into a downpayment for another house. If you default on the loan, you will lose the principal in the annuity, but the interest is still yours to keep.
These annuities are handled only by triple-A rated insurers, but if the company gets downgraded, the annuity can be transferred. Borrowers eligible for Federal Housing or Veterans Benefits Administration loans, who put down only 5% with the government's help, would not be eligible for such loans.
So far, the mortgage/annuity plan has drawn the most interest from two groups among his clients, says Peter Grum, executive vice-president of Hamilton Financial in San Francisco (800 541-0024), one of several lenders offering government approved AIM loans in 26 states. Wealthy clients like it because they can maximize their tax advantage. With a larger loan, they get a greater deduction--and the annuity grows tax-deferred. "They can get a $1.5 million loan with only 5% down," he says. AIM loans are also proving popular as a way to help a child buy a home. "The parents or grandparents can put money in the annuity as a gift," says Grum. "They have easier access than with a conventional downpayment because they can take out the interest."
KEY QUESTION. Since it provides a forced savings plan, the AIM loan makes sense for people who aren't already putting money away. But disciplined savers might do better investing the difference in monthly payments between the AIM loan and a conventional mortgage in some other savings vehicle. For example, a variable annuity might be preferable to a fixed annuity in a rising-interest-rate environment. "We're at historically low interest rates," says Paul Haveman, vice-president of HSH Associates, publishers of mortgage information. "Why would I want to lock in at the low end of the scale? Thirty years is a long time."
Among those lenders offering the AIM mortgage are Bancplus in San Antonio (800 770-4246), Directors Mortgage Loan in Riverside, Calif. (800 442-4966), Inland Mortgage in Indianapolis (800 284-4462), and Keycorp in Cleveland (800 487-8334). You can also obtain information from the Federal National Mortgage Assn. (800 7-FANNIE), which has agreed to buy conforming AIM loans for the secondary market.
If you wouldn't otherwise invest your money, it might be worth locking in part of the downpayment on your new home at 6.25%. At least you'll be earning something extra down the line--and you'll know in advance how much it will be.
HOW A MORTGAGE WITH ANNUITY COMPARES Assume the purchase of a $100,000 home with a downpayment of $20,000 and a 30-year mortgage rate of 8.5% Conventional Asset-integrated mortgage mortgage CASH DOWN ON HOUSE $20,000 $5,000 CASH TO ANNUITY 0 $15,000 LOAN AMOUNT $80,000 $95,000 MONTHLY PAYMENTS $615 $730 PAYMENTS AFTER 7 YEARS $51,660 $61,320 INITIAL MONEY DOWN $20,000 $20,000 TOTAL OUTLAY $71,660 $81,320 MINUS ANNUITY 0 $23,200* PAYOUTS AFTER 7 YEARS $71,660 $58,120 PAYOUTS AFTER 15 YEARS $130,723 $113,274 PAYOUTS AFTER 30 YEARS $241,408 $184,632 * Assumes annuity pays current rate of 6.25% annually DATA: FINANCIAL INTEGRATION INC. FRANKLIN HAMMOND