The Transferable Mortgage - What if?

The Situation

Imagine, you love your home and you love the interest rate for the loan on that home. It’s at 4.375% for 30 years fixed. The interest is so low on the loan that it doesn’t provide you as great a tax shield. But you don’t care because a tax shield is worth much less than the savings you get from the low interest rate.

Then, you get the news. You have an opportunity for a better position with the company and greater opportunities. There’s one catch. You have to move to Hillsboro, Oregon. So, you start figuring out what it would take to make the move and what it would cost.

As you think through the opportunities and costs, you come to your current mortgage. You’ve got to give up that interest rate if you sell the home and buy a new one in Oregon. And rates aren’t likely to be as good. In fact, when the real estate market recovers, you can expect to say goodbye to rock-bottom low interest rates. So, it looks like to buy a new home in Oregon, you will pay a little more for the home and you definitely will pay more for your loan. The bank quotes you at 5.875% with the expectation that rates are moving up.

That means for a $400,000 loan, you will pay $2,366 a month in P&I versus $1,967 a month, or $399 more just because of the difference in interest rates. Ouch. This doesn’t include that you will be paying the lender for origination and other charges on the loan that likely will total about 1% to 1.5% of the loan, or about $4,000 to $6,000. Ouch again.

Damn. That’s going to add more money to your monthly mortage cost.

Imagine the Possibilities of a ”Transferable Mortgage”

Now imagine this. Your bank notifies you of a new program whereby you can transfer your mortgage to a new home because you are a good steady-paying customer. So, you can take the remaining balance on your loan of $300,000 and apply that loan to your new home. Of course, you will need to come up with the remaining balance on the property but the bank has options for that. So, you have just figured out how to finance the bulk of the property and keep that killer interest rate. The bank offers you the remaining balance at prevailing market rates at 6%. Though you are paying more for the second loan, you know that you are saving a ton of money. Awesome. It’s a win. The bank keeps their loan and good customer. You keep your loan’s interest rate. And some of the closing costs are lower too. In a new world, it’s a win-win.

The Transferable Mortgage – What It Is

The Transferable Mortgage is designed to be a loan that you carry with you from home to home for as long as you choose to do so. Of course, this is very different that an ”assumable loan,” which is to allow another buyer to assume or take on the obligations of your loan. You can imagine that if someone has a very low interest rate, that they would like to carry that loan with them and apply it to a new property. Of course, the homeowner would have to be buying a new home within a set span of time since the sale of the previous home.

And there would have to be some closing costs in terms of title insurance and title fees, and some transfer costs. However, the overall benefit to the homeowner would be clear.

Americans could accumulate greater wealth if they could take a 4.25% interest rate with them when they move. This would enable a long term faster paydown of debt and accumulation of equity in the property. Instead, today they incur all of the costs associated with purchasing a new home with a new loan. Relocation companies that often pay some level of costs of the new loan would benefit here as well as the cost of relocating an employee potentially drops.

The Transferable Mortgage concept would mean a wholesale change to the mortgage industry as we know it. After all, lenders make their money from two primary loans – purchase money loans and refinancing loans. The refinancing side would be impacted by this as there would be fewer loans being refinanced.

The Transferable Mortgage and the Cell Phone

A few years ago, cell phone users who wanted to change providers lost their phone number with the changeover. Today, through legislation, cell phone companies have to carry your phone number over to your new phone if you request it. Separately, there is also a push to be able to use the same cell phone for whatever network you choose to use.

The Transferable Mortgage is similar. The point is to allow it to be transferred and applied to a new property. Again, there have to be checks and balances in terms of many of the responsibilities title often performs still have to be done. For instance, title research, insuring title, etc. The lender has to be sure that the property has free and clear title and can apply the lien.

When It Could Work and When It Wouldn’t

The Transferable Mortgage would be an option by the homeowner to carry with them or close out when they purchase a new home. The reason? Because it all depends on the interest rate of that loan and whether it is comparable or better than prevailing market rates. However, over the long term, many Americans are going to be able to secure an interest rate that will be more advantageous and worth taking with them. Here’s a scenario.

A homeowner has a 6.5% interest rate. They are moving to a new city. Currrent market rates are 5.75% so they decide that they don’t want to “transfer” their mortgage. They get a new loan on the property at that 5.75% rate. Four years later, the homeowner is moving again. The market rate for interest rates at that time is 6.75% so they opt to “transfer” their current loan to the new property.

Based on this, one can see that homeowners will strive toward what offers the best possible rate so that the use of Transferable Mortgages would gradually increase over time.

Now, there are other scenarios such as the cost of the new home and required financing period that would play into whether the Transferable Mortgage would be beneficial or not. But, in my opinion, there is definitely a place for the concept.

Simplified Explanation and Reality

Now, I understand that the concept has inherent complexities to make it work. So, I envision this as something that will take some level of potential heavy lifting. I look at this as the next great efficiency in the real estate industry. After all, to raise the standard of living for Americans, you have to employ changes that are much like what a business would do. You work to bring in more money, you strive to lower your expenses, and build wealth off of savings. The Transferable Mortgage concept has the potential to contribute to the latter two aspects of this – reduce your expenses and build wealth through equity creation.

Perhaps the start of this is more of a boutique product or upgrade option. Longer term, I could see the concept take hold and provide Americans with a way to eliminate higher interest expenses associated with mortgages as well as the repetitive series of costs associated with moving and buying homes.

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