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Special Reports
Not Your Father's ARM Loan
New CUMEX Products Aimed at Making Housing Affordable
By Jennifer Harmon
LEXINGTON, MA--CUMEX Mortgage Service Center has launched two new programs aimed
toward turning more Americans into homeowners. The direct seller and servicer for Fannie Mae and Freddie Mac has
added 40-year fixed-rate loans and interest-only loans to its extensive product menu.
The 40-year fixed-rate mortgages are expected to appeal to first-time homebuyers
as well as current homeowners looking to relocate to higher-cost areas, according to Carrie Strube, director of
lending for CUMEX, which has been serving the home financing needs of credit union members for over 20 years. With
offices in Massachusetts, Connecticut and Vermont, the full-service company offers access to FHA and VA insured
mortgage programs.
"We do a lot of surveying of the marketplace in the New England area. The
housing market is strong here," Ms. Strube said. "The 40-year fixed and interest-only ARMs are familiar
products in this area and are attractive to the higher-income bracket borrowers. They give the credit unions a
competitive edge over banks in the area."
The drawbacks to the 40-year fixed-rate mortgages, which are offered through the
company's retail, correspondent and wholesale outlets, are the increased length of the loan and consequently the
increase in amount of total interest paid for the life of the loan, according to Ms. Strube. But this is not considered
to be a major drawback as the average life of a mortgage loan is four to seven years, she said.
"It's a way to put homeownership within reach of more Americans. Home values
just continue to increase, especially in New England, probably at a much faster rate than most consumer salaries
have been increasing," Ms. Strube said.
How much could a consumer save over a 40-year mortgage? If a homebuyer put down
10% on a $250,000 home, that would leave the homebuyer with a mortgage of $225,000. With the 30-year fixed interest
rate of 5.75%, the principal and interest payment would be $1,313.04. On a 40-year mortgage at 6%, the principal
and interest payment would be $1,237.98, a savings of $75.06 a month, she said. "So, to extend it for another
10 years, the homebuyer is going to save $75.06 monthly, which to someone purchasing a home for the first time,
could be significant."
The new interest-only ARM is an additional program aimed at making homebuying
more affordable, because borrowers are allowed to make lower payments in the earlier years of the loan. This interest-only
ARM is a variable rate product that provides for an initial fixed-rate period of three, five or seven years, and
yearly interest rate adjustments for the remainder of the term.
During the initial fixed-rate period, the mortgage payment consists of an interest-only
payment, plus any applicable escrows for taxes and insurance. Subsequent to the initial fixed-rate period, payments
will consist of principal and interest and will adjust annually at the time of the interest rate adjustment. There
is no negative amortization, and the program is only available for single-unit residencies, including condominiums
and two- to four-unit properties.
The program is ideal for people planning to stay in their home for only a short
period of time, said Ms. Strube. It offers lower monthly payments for the first three, five and seven years, depending
on the loan type. This frees up more of the borrower's cash to purchase items such as furnishings, she said.
An example of how this works is on a standard 3/1 ARM and a $250,0000 loan at
4.625% interest. The monthly principal and interest payment is $1285.35. Approximately $963.55 of that is interest
and $331.82 goes towards principal. The downside, she said, is that you still have to pay the principal plus interest
during the second phase of the loan.
"We're getting lots of phone calls for purchases and pre-approval. Interest
only is one of the main products people are asking for," Ms. Strube said.
"The product is out there. People are doing their research on the Internet.
But it's not for everybody. It's not for those who need a fixed payment in five or seven years ... for those who
are struggling to get by. It's good for the self-employed borrower, commission-type people, those who bring in
a certain amount once, twice or three times a year who can pay it down. That is why we do a lot of education about
the product. It won't be great if the default ratio is high. We want to make sure the consumer gets the right product."
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