25 April 2024

The Fifteen-Year Rate Switch

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Mortgage borrowers usually must decide between low rates or a long term. But one lender says you can have both.

Pentagon Federal Credit Union, the Alexandria, Va.-based credit union known as PenFed, has rolled out a 30-year amortizing mortgage that changes its rate just once, 15 years into the term of the 30-year loan. The credit union will be writing loans with the 15/15-adjustable rate mortgage up to $2 million.

PenFed says the product, launched in February, is designed to appeal to borrowers who are typically looking to refinance or purchase a second home, says Debbie Ames Naylor, executive vice president of mortgages at the federal credit union.

While the interest rate for PenFed's 15/15 ARM is fixed for the first 15 years, the monthly payment is still calculated over a 30-year amortization schedule, Ms. Naylor said. The loan rate change after the first 15 years is capped at a maximum of 6 percentage points on top of the original rate; so that a loan that is at 3.75% for the first 15 years can't rise any higher than 9.75%.

For a $1 million jumbo loan with the 15/15 ARM, the monthly principal-and-interest payment would be $4,560 at PenFed's recent rate of 3.625%, compared with a 30-year fixed loan for the same amount with a rate of 4.25% and a payment of $4,919. The interest savings on the first 15 years using the 15/15 ARM would be more than $86,000, PenFed says. "We're trying to give a lot of stability and value back to the borrowers," Ms. Naylor said.

Jeanine Hawk and her husband, Michael, refinanced their San Francisco home this year with a PenFed 15/15 mortgage. They closed the 3.85% jumbo loan after reading about it in a local newspaper. "It seemed like the right compromise for us," said Ms. Hawk, 54, who is completing her doctorate at San Francisco State University. Her 61-year-old husband works at the League of Conservation Voters in Oakland, Calif. "We're planning for our retirement and we wanted to be certain about our income stream," she said.

So far, the lender says it has received about 600 applications for 15/15 loans. It has closed 100, split almost evenly between purchases and refinances. About 30% of the closed loans were jumbos. (Jumbo loans are those above $417,000 in most markets, and more than $625,500 in high-price markets such as New York and San Francisco.)

The 15/15 mortgage isn't really new, said Fowler Williams, president of Crescent Mortgage in Atlanta, a mortgage lender that partners with community banks and credit unions to provide mortgages. Mr. Williams said that banks and other institutions have offered products with a "two-step" ARM, when the rate just flips one time, but typically the first rate change comes at either seven or 10 years, not at 15 years.

Click here for the full article in the Wall Street Journal.

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