There's a new idea in mortgages that may appeal to some move-up buyers and to others who have enough money for a down payment of at least 10 percent.
It has an unwieldy name - Asset Integrated Mortgage, or AIM - but an interesting concept: Use part of your down payment for an investment.Instead of making a $20,000 down payment on a $100,000 house, you put down only $5,000 and invest the other $15,000 in an annuity that you get through the mortgage lender.
The lender considers the annuity equal to a down payment since he can take part of it if you default on your mortgage. So even though you're only making a 5 percent down payment, you don't have to pay the mortgage insurance that usually is required when you put down less than 20 percent.
The advantage of AIM is that the lump sum annuity will be earning interest even while you use it as collateral for your house. The disadvantage is that, with the smaller down payment, your monthly mortgage payments will be higher.
For example, on a house that costs $100,000, a $5,000 down payment would leave a $95,000 mortgage. At current interest rates of about 8.5 percent, the monthly payment would be $730. By comparison, if you put down $20,000 and got an $80,000 mortgage, the monthly payment would be $615.
If you're a financially savvy homeowner with the discipline to save the difference between those two mortgages - $1,384 a year - or to make a 5 percent down payment and invest the leftover $15,000 yourself, you probably could do better over time than with the annuity idea.
But an annuity has the advantage of tax-deferred status - you don't pay taxes on the interest it earns until you withdraw the money. And the investment doesn't require any decisions - a lump sum goes to work for you when you buy the house and continues until you cash it in.
"By choosing an AIM loan, consumers in effect are able to put their down payments to work for them," said Frank Demarais, vice president for product development at Fannie Mae, the big secondary mortgage lender.
AIM was developed by a Cleveland company, Financial Integration Inc. Initially, the mortgage will be offered by only a few lenders - BancPlus Mortgage, Directors Mortgage Loan, Hamilton Financial, Inland Mortgage and Key Corp.-Society Mortgage. These lenders will make the AIM program available immediately in about 50 cities.
However, since Fannie Mae has agreed to buy the AIM mortgages from lenders, you'll probably find many more of them offering this loan in future months.
Financial Integration estimates that in the example above - buying a $100,000 house with $20,000 cash to invest at current interest rates - a homebuyer who used the AIM program would accumulate about $92,460 in the annuity over 30 years.
Deborah Nells, a spokeswoman for Financial Integration, said the annuities in the AIM program are invested with two insurance companies - American General Life Insurance and AIG (American International Group.) Each has a triple-A rating from Moody's or Standard & Poors and the annuities are paying a fixed interest rate of about 6.7 percent.
Van Carter, president of Financial Integration, said home buyers who choose AIM can decide for themselves what portion of the down payment to allot to the annuity. But at a minimum you need a down payment of 5 percent and another 5 percent for the annuity.
AIM can be used with either a fixed-rate or adjustable mortgage on owner-occupied properties. You get the same mortgage terms and rates as you would on any other mortgage.
When you sell the house and pay off the mortgage, you have several options:
- Keep the annuity going.
- Take the money in a lump-sum payment. But as with all annuities and tax-deferred savings plans, if you're younger than age 59, you'll have to pay a 10 percent penalty.
- Use part or all of the annuity for a down payment on your new house, as long as the new lender is in the AIM program.
- Draw on the annuity in monthly installments at retirement.
- Sell the annuity to whoever buys your house as part of the equity in your home.
You can get more information on the AIM program and find the lender nearest you by calling Fannie Mae toll-free: 1-800-732-6643.