Merrill Lynch Credit Corporation (MLCC) announced last week the launching of the blended-rate mortgage. This is an ARM product that offers the lower rate of an adjustable-rate mortgage (ARM) with the lower risk of fixed-rate loans. Although the product allows borrowers to make interest-only payments during the initial period, it also gives them the flexibility of paying principal at any time without penalty.
According to a release from the company, the new product helps diversify interest-rate risk by blending a fixed-rate and an adjustable-rate type product, with initial reset periods of 3, 5, or 7 years. And as interest rates fluctuate, the amount the blended rate will adjust going up or down is minimized relative to a traditional ARM, increasing or decreasing by half. This offers borrowers more protection from rising interest rates.
This new mortgage has interest-only payments in the blended-rate period - thus freeing up cashflow for other financial necessities. With no prepayment penalties involved, homeowners can pay toward their principal at any time and in any amount. There is no penalty entailed in reducing the borrower's loan balance as well as the interest expense. It also allows for reducing monthly payments in the initial period.
Aside from this, like an ARM, rates on this type of mortgage are adjusted every six months based on the six-month Libor throughout the term of the loan. The loan is amortized and the interest still adjusts semi-annually based on the six-month Libor as well as a margin of 2%.
According to MLCC, having rates based on the six-month Libor can be considered beneficial because this index has traditionally been lower compared to the prime index. Also, although past performance does not necessarily indicate what future performance will be, it should be noted that the six-month Libor Index never rose above 7% in the last 12 years.
Representatives from Merrill said that as this product allows borrowers to reduce monthly payments and maximize their personal cashflow, it might be attractive to borrowers considered more sophisticated and those who will prefer to retain control of their liquidity needs. Furthermore, large loan amounts are available, including jumbo loans. This product is also targeted towards borrowers who plan to stay in their homes for seven years or less and who want to buy a larger house.
"When considering a blended-rate mortgage, homeowners should evaluate the length of time they plan to own their own home and their overall financial goals," the firm wrote in a press release. "Clients may want to select the blended-rate period that matches or exceeds the length of time they plan to own the home."
The representatives also noted that thoughts about securitizing this product are preliminary at this point.
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