Your Money > Your Home
Are portable mortgages for you?
A lot of you say the idea is appealing.
June 10, 2003: 12:51 PM EDT
By Jeanne Sahadi, CNN/Money Senior Staff Writer

NEW YORK (CNN/Money) - Who doesn't want to freeze-frame a good time and make it last? The latest mortgage product from E*Trade promises to do just that.

But like an extended warranty, you'll pay extra for the privilege and you may not need it.

The lending branch of E*Trade, best known for its online brokerage, launched its first "portable mortgage" this week.

The product lets home buyers lock in today's low interest rates on a 30-year fixed-rate mortgage, and also apply it to the next home they buy.

You're only allowed to use that portability once, however, and portability is not allowed on refis.

What will it cost?

Knowing today what you'll pay tomorrow is an attractive proposition. Of the more than 12,000 people who responded to a CNN/Money poll, 83 percent said they found the idea of a portable mortgage appealing.

"It gives consumers certainty in terms of their housing costs," said Robert Bernabe, head of Retail Mortgage Lending at E*Trade Financial.

But while mortgage financing experts say the idea is an intriguing one, they also say it's too early to tell whether a portable mortgage would be a good deal.

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That's partly because no one can predict where rates will go or whether you will have to or want to move when rates are substantially higher than they are today, said certified financial planner Barbara Steinmetz, a former real estate broker.

There are other factors to consider, too.

How much loan do you need? E*Trade's portable rate is tied to the 30-year fixed rate on jumbo loans (mortgages above $322,700), which cost more than conforming loans (those below $322,700).

Consumers will pay a premium of 3/8 of a point on top of the rate for a 30-year jumbo. So if you are buying a house that only requires a conforming loan, you would be paying two sets of premiums -- one from the jumbo rate and one from the portable loan.

As of Friday, June 6, the average conforming loan rate for a 30-year fixed was 5.31 percent nationwide, while the rate for the 30-year jumbo was 5.64 percent, according to HSH Associates, a publisher of mortgage information.

Do you qualify? To qualify for a portable mortgage, you must have a 20 percent down payment and fairly good credit (a FICO score of at least 660). You must have no history whatsoever of foreclosures nor any late mortgage payments within the past 12 months.

The homes you purchase must be single-unit primary residences -- i.e., no second homes. And the portable mortgage is only for a 30-year fixed-rate term. There currently is no 15-year option.

Do you dream of a bigger home? When you buy your next home, in addition to transferring the rate on your portable mortgage, you also can apply your existing loan balance to your new home.

But if the next home you purchase costs more than the price of the home you're selling, you'll likely need another mortgage to cover the difference. But the rate E*Trade offers for that other mortgage will be set according to market conditions at that time. If rates do rise significantly, that would reduce some of the benefit of your portable mortgage, though this blended financing could still save you money.

If the next home you buy costs less than the home you're selling, you can pay down as much of the first mortgage as you'd like without penalty, and then have the remainder of your loan re-amortized so as to lower your monthly payment on your new home.

Are you sure you're going to move? You might think you'll want a new house in 10 years, but if homes at that time are too pricey for your wallet you might choose to remodel instead, Steinmetz said. In that case, you will have paid a premium on your mortgage to lock in a portability option that you then don't exercise.

Why don't all lenders offer portable loans?

Portable mortgages have been discussed for years, but no one could come up with an economically feasible model, said Doug Duncan, chief economist for the Mortgage Bankers Association.

E*Trade is a relatively small fish in the mortgage sea -- last year it originated $6.2 billion in mortgages in what is nearly a $3 trillion market. The bigger fish -- large mortgage lenders -- will be watching this experiment with interest to see if it works, but "they're skeptical," Duncan said. Their big question is whether consumers will pay a premium in a market with record-low rates to protect against the unknown.

For consumers who move around a lot -- say every five years or so -- it's possible, Duncan said, that some consumers may do just as well with an adjustable-rate mortgage (ARM). ARMs typically carry lower rates than a 30-year fixed for a set period of time, say up to five years, and then they adjust to whatever the current rate is. If you know you'll sell your house by the end of the fixed term, you needn't worry about being stuck with a higher rate, and you will not have paid a premium during the first five years on the portable mortgage.

On the other hand, if you're convinced rates will be much higher tomorrow and you're willing to pay a premium to lock in today's rates, then a portable mortgage might be worth considering. Just make sure you're choosing that mortgage not only for its portability but because it's the best deal for your needs. (For tips on financing a home, click here.)

The portable mortgage will be available for a limited time. Just how long will be determined by consumer demand and market conditions, said E*Trade spokeswoman Pam Erickson.  Top of page

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