American Express: Don't pay for home without it

NEW YORK (CNNMoney.com) -- You pay hundreds, sometimes thousands, of dollars on your mortgage every month. Just imagine how many rewards points that could earn on your plastic. Now, American Express is aiming to make that a reality for its cardholders.

In what is considered to be a first for the credit card and mortgage industries, American Express on Wednesday said it will now allow cardholders with any of its charge or credit cards and a prime loan from American Home Mortgage to charge their mortgage payments and earn reward points for doing so.

Say you pay $2,000 a month on your mortgage and typically charge $1,000 for other expenses. If you charge the full $3,000 on, say, an American Express Blue Cash card, that could give you a cash rebate worth over $400 a year. That's because once you've charged $6,500, you'll get at least 1.5 percent back on further purchases (and as much as 5 percent back on any charges for groceries, gas or drugs), according to Curtis Arnold, founder of CardRatings.com

Until now, mortgage lenders typically wouldn't take credit cards. And "card issuers would not encourage [the charging of mortgage payments] since this is in most cases a major red flag that the customer is in financial trouble," said Robert McKinley, president and chief executive of CardWeb.com.

But American Express (Charts, Fortune 500) is limiting its venture to cardholders it pre-authorizes before enrolling them, and then checks on them every month thereafter before a mortgage payment is charged.

Those cardholders will also have to qualify for a new-home-purchase prime loan or refinance prime loan - which typically goes to those with good credit - as opposed to subprime loans which are targeted to home buyers with bad credit.

American Express currently has one partner - American Home Mortgage. But later this week, it plans to announce another partner-lender, with more partners in the works, said company spokesperson Christine Elliott.

At American Home Mortgage, qualified prime-loan borrowers may take out a variety of fixed or adjustable-rate first mortgage loans that don't exceed $1 million, according to Mary Feder, a company vice president. Excluded from the program, however, are option ARMS, government loans, high loan-to-value mortgages, as well as no- and low- documentation loans.

To qualify for a prime loan, American Home Mortgage (Charts) takes into account borrowers' credit scores (although it doesn't impose a minimum per se), the size of their down payment, their debt-to-income ratio and their liquid reserves, among other things.

The initial cost to qualified borrowers is $395 paid to the lender at closing, which will limit the value of this program to cardholders in the first year. Mortgage payments are automatically charged every month. That prevents late payments to the lender and lets the borrower earn card reward points more quickly than they used to since a mortgage payment is typically the largest monthly cost for most people.

For those who never have trouble paying off their mortgage payment and their plastic in full every month, it could be a good deal. But for borrowers who run the risk of not making adequate and on-time payments on their card, the long-term cost can be high.

American Express offers charge cards - which have no set spending limit and must be paid in full every month - and credit cards - which do have credit limits and charge interest on any balance your carry month-to-month.

Borrowers who fail to pay off their American Express charge card in full (or at least the minimum due on their credit card) on time every month will face whatever penalties are specified by their card terms, Elliott said. In the case of the charge card, that could mean fees, a percentage of the outstanding balance or both, depending on how late you are with your payment.

Being late with your credit card payment will likely cost you a late fee, which can range around $40, and it can hurt your credit score and subject you to a penalty interest rates as a result.

What's more, if you typically pay off some but not all of your balance on your credit card, you may end up paying interest on a much larger amount than usual if you charge your mortgage payment.

And keep in mind, your minimum payment due on your credit card will be higher, since your balance - including your mortgage payment - is likely to be higher than normal.

That's especially the case if you have an adjustable-rate mortgage with an interest rate that is going to adjust upward in the near future - and with it, your monthly mortgage payment.