Innovative Mortgage Options Free Up Cash, Allow Upgrades

In recent years, finance companies and banks have developed non-traditional financing options to help homeowners upgrade their houses or increase their cash flow.

Many use the extra scratch to pay bills, invest for retirement or renovate backyards into a mini tropical oasis.

United Bank of Springdale began offering a 100 percent finance option a little over a year ago, and Jim Bell, senior vice president, said it’s been a good product for the mortgage division.

The product, called UB 100, is a 30-year, fixed-rate note that enables UB Mortgage to lend 100 percent of a home’s value without requiring mortgage insurance.

Traditionally, homes are financed by putting down up to 20 percent of the price of the home and financing the remaining 80 percent. Mortgage insurance, worth about 1 percent of the value of the home, must be paid to the mortgage company for a loan that is 80 percent or more of a home’s value, raising the monthly payment.

But the UB 100 allows a borrower with a credit score of at least 640 to buy a home worth up to $500,000 with no down payment and make a fixed rate, interest-only payment, Bell said.

What’s more, United allows the borrower to determine the amount of time they’ll make the interest-only payment, from one to 10 years, he said.

Justin Moore, manager of Wells Fargo Home Mortgage in Springdale, said from his perspective, there are as many ways to make a home loan as there are borrowers.

Many people are not relying on paying down their mortgages to earn equity in their homes, he said. Instead, some are speculating on the economic boom in the area to boost the value of their property while they’re living in the house.

Wells Fargo products like the 100 percent financing and interest-only payments have been catching on, Moore said, because they help homeowners with cash flow. One of his major problems is that most people don’t know their home can be financed any other way than by putting a percentage down and financing the other percentage at a fixed or variable rate.

Moore gave an example of a $300,000 home purchased two different ways. In the traditional scenario, a purchaser might put down 5 percent, leaving $285,000 to be financed at a rate of 5.75 percent for 30 years. A principal and interest payment would come to about $1,838, not including taxes and insurance, he said.

In the second scenario, the same home can be purchased with two mortgages with no money down. The first mortgage would be for 80 percent of the value of the home, or $240,000 at 5.375 percent for 30 years, with a monthly payment of about $1,344. A second mortgage on the remaining 20 percent value of the home would be for $60,000 with a 5-year fixed rate at 5.75 percent and a variable rate for the remaining 25 years. The initial monthly payments would be about $290, and the two payments would run $1,634, or about $204 less than the traditional scenario above.

That’s $2,448 a year, Moore said, plus the borrower gets to keep the $15,000 it would have used as the down payment to use for upgrades or furniture.

Both Moore and David Oberle, who is the president of United Bank’s mortgage division, said the no-interest payment option is great for vendor executives who are moving to the area and may be gone in a few years.

They save money on payments, don’t invest in equity, then they can collect on the appreciated value of their home when they sell it.