WO2002023439A1

WO2002023439A1 - Combined first mortgage and home equity line of credit product and method

Info

Publication number: WO2002023439A1
Application number: PCT/US2001/028513
Authority: WO
Inventors: Franklin D. Raines; Howard Nelson; Michael R. Thorson
Original assignee: Fannie Mae
Priority date: 2000-09-13
Filing date: 2001-09-13
Publication date: 2002-03-21
Also published as: AU2001290817A1

Abstract

A new mortgage product and method that permit a borrower to obtain a unified line of credit (102) with multiple sub-accounts to facilitate the purchase of a new home (100) or refinance an existing mortgage (200) the 'purchase money sub-account' and/or 'refinancing sub-account' while contemporaneously establishing a home equity line of credit (104) that can be drawn upon in the future (the 'home euqity sub-account) (110) when loan (106) is approved. Borrower may also make cash down payment (112). The borrower makes only one application for the combined mortgage product and attends a single closing. Borrower may take additional advances from the home equity sub-account (114). The unified line of credit also allows the borrower to receive one monthly mortgage statement (116) and makes one montly payment (118) to cover the outstanding balance on the purchase money or refinancing sub-account as well as any payments due on the home equity sub-account.

Description

COMBINED FIRST MORTGAGE AND HOME EQUITY LINE OF CREDIT

PRODUCT AND METHOD

BACKGROUND OF THE INVENTION The present invention relates generally to a new first mortgage loan product and method that combines a traditional mortgage loan with a home equity line of credit. Specifically, the present invention permits a borrower to obtain a unified line of credit with multiple sub-accounts to facilitate the purchase of a new home or refinance an existing mortgage loan (the "purchase money sub-account" and/or "refinancing sub-account") while contemporaneously establishing a home equity line of credit that can be drawn upon in the future (the "home equity sub-account"). The borrower makes only one application for this mortgage loan and attends a single loan closing. This new mortgage loan and method also allow the borrower to make a single monthly payment to cover the outstanding balance on the purchase money sub-account or refinancing sub-account as well as any payments due on the home equity sub-account. As the balance is repaid on the purchase money sub-account or refinancing sub-account, additional funds become available under the home equity sub- account.

In a traditional home purchase or refinance situation, the potential borrower applies for a single advance mortgage loan through a bank, mortgage company or other appropriate lender. The appraised value of the property is used to determine the maximum loan amount for the home purchase or refinance transaction. In a typical purchase money loan, up to 80% loan-to-value ("LTV") can be borrowed, thereby requiring that the borrower provide the other 20% through a cash down payment. In a typical refinance transaction, the mortgage loan amount is limited to 80% LTV and 20% of the equity remains untapped. In some purchase money or refinancing situations, a lender will advance an amount greater than 80% LTV, provided the borrower obtains private mortgage insurance ("PMI") at the borrower's expense.

The traditional mortgage loan provides for a fixed or variable rate of interest, with an optional 15 or 30 year term. The loan will likely provide for monthly payments. Other types of mortgage loans are also available which provide for different interest rates and payment terms. For example, variable rate mortgages may be convertible to fixed rate products.

The traditional mortgage loan is secured by a first lien on the home. If there happens to be excess equity (such as from the cash downpayment or appreciation in value), the homeowner may separately apply for and obtain a home equity line of credit to access the excess equity. The line of credit is typically secured by a second lien on the home. The home equity line of credit requires that the borrower/homeowner make a separate loan application, often with another lender, and attend a second closing. Moreover, the homeowner receives separate monthly bills and is required to make separate payments for the traditional mortgage and the home equity line of credit.

Accordingly, a need exists for a mortgage loan product and method that allow the home purchaser or refmancer to obtain a traditional mortgage loan contemporaneously with a home equity line of credit through a single application and closing which is wholly secured by a first lien on the home. A further need exists for such a mortgage loan product and method that consolidate the billing process by allowing the homeowner to receive one statement each month and make one monthly payment to cover both the traditional mortgage loan and the home equity line of credit. A still further need exists for such a mortgage loan product and method that automatically increase the amount of credit available under the home equity sub-account as the purchase money sub-account or refinancing sub-account is repaid.

The present invention is a new mortgage loan product and method which provides these desirable benefits and features through a unified line of credit with multiple sub-accounts.

SUMMARY OF THE INVENTION

In accordance with one aspect of the present invention, a mortgage loan product and method are provided to finance the purchase or refinance of a home while contemporaneously establishing a facility for future advances wholly secured by a first lien on the home. The method includes the steps of making available to a borrower a unified line of credit with a predetermined total credit limit based on the appraised value of the home, allocating under the purchase money sub-account as a first advance a portion of the total credit limit for purchasing or refinancing of the home at closing, and allocating under the home equity sub-account the remainder of the total credit limit for future advances.

In another aspect of the present invention, the total credit limit secured by the first lien on the home is limited to about 95% of the appraised value of the home. The advance under the purchase money sub-account or refinancing sub-account is limited to about 80% of the appraised value of the home. At closing, the portion of the total credit limit available for future advances under the home equity sub-account is then valued as the difference between the total credit limit and the outstanding balance under the purchase money sub-account or refinancing sub-account. The credit limit for the home equity sub- account may therefore increase as the outstanding balance on the purchase money sub- account or refinancing sub-account is amortized. In a still further aspect of the present invention, future advances under the home equity sub-account are available by writing checks, preferably over a ten-year period. Balances created by these checks are preferably subject to a variable rate of interest applied on a daily basis. The variable rate of interest would be based upon an index such as the prime rate of interest plus a margin established at loan closing. Borrowers may also have an option to convert any variable rate balances to fixed-rate term draws (the "fixed-rate conversion option")

Accordingly, it is an object of the present invention to provide a new and improved mortgage loan product and method that provide through a unified line of credit a purchase money sub-account or refinancing sub-account for a traditional mortgage loan and home equity sub-account to facilitate future advances.

Another object of the present invention is to provide such an improved mortgage loan product and method that require only a single application and closing to obtain a traditional mortgage loan and a home equity line of credit.

Yet another object of the present invention is to provide such a new mortgage loan product and method that reduce application and closing costs by combining the traditional mortgage loan and home equity line of credit.

Other objects and advantages of the invention will in part be obvious and will in part be apparent from the specification.

The present invention accordingly comprises the various steps and the relation of one or more of such steps with respect to each of the others, and the product which embodies features of construction, combinations of elements, and arrangement of parts which are adapted to effect such steps, all as exemplified in the following detailed disclosure, and the scope of the invention will be indicated in the claims. BRIEF DESCRIPTION OF THE DRAWINGS

For a fuller understanding of the invention, reference is made to the following description, taken in connection with the accompanying drawings, in which:

Fig. 1 is flow diagram depicting the steps carried out in obtaining a new mortgage product for a home purchase in accordance with a preferred embodiment of the present invention;

Fig. 2 is a flow diagram depicting the steps carried out in obtaining a new mortgage product for a home refinance in accordance with a preferred embodiment of the present invention.

Fig. 3 is a flow diagram depicting an example of the manner in which the new mortgage product of the present invention can be used in connection with the purchase of a home; and

Fig. 4 is a flow diagram depicting an example of the manner in which the new mortgage product of the present invention can be used in connection with the refinance of an existing mortgage on a home.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS

The present invention is a new mortgage loan product and method that allow home purchasers and owners to obtain a unified line of credit with sub-accounts for a traditional mortgage loan and a home equity line of credit through a single application and closing process.

Reference is first made to Fig. 1 of the drawings which depicts the steps in the process for obtaining the new mortgage loan product of the present invention. To begin the process, the potential borrower selects a home to purchase in step 100. The value of the desired home is determined in step 102. The home value in step 102 is then used to determine the amount of credit for which the borrower qualifies (the "Total Credit Limit"). In accordance with the present invention, the potential borrower is eligible to apply for a Total Credit Limit in an amount up to about 95% of the home value. Accordingly, in step 104 as depicted in Fig. 1, the borrower applies for up to the 95% LTV figure.

The loan application is then evaluated in step 106. The usual factors used to determine credit risk and other relevant factors are used to evaluate whether or not the requested loan will be approved for the borrower. If the loan is not approved, the process ends at step 108.

If the loan is approved, the closing will occur at step 110. At the closing, the borrower takes an advance of up to about 80% LTV to purchase the home in step 110. This represents the advance under the purchase money sub-account. At the same time, the borrower establishes a facility under the home equity sub-account to obtain additional advances up to the Total Credit Limit (i.e., 95% LTV) less the advance under the purchase money sub-account (i.e. up to 80% of the LTV). In step 112, the borrower makes a cash down payment of the balance due. Thus, for example, if the borrower takes an advance of 80% LTV under the purchase money sub-account and makes a downpayment of 20%, credit equal to 15% of LTV is available for additional advances. However, if the borrower puts 30% down, then only 70% LTV is used in the purchase money advance leaving 25% of LTV available for additional advances.

At any time after the closing, in step 114, the borrower may take additional advances under the home equity sub-account against the Total Credit Limit. These subsequent advances are preferably subject to a variable interest rate which may be convertible to a fixed rate. At step 116, the borrower receives a single monthly statement which sets forth the total amount due under all active sub-accounts under the unified line of credit. In step 118, the borrower makes a single monthly payment on the unified line of credit.

Reference is now made to FIG. 2 of the drawings which depicts the steps in the process for refinancing an existing mortgage loan while contemporaneously establishing a home equity line of credit under a single application and closing process. The homeowner begins the process by applying for a unified line of credit which includes a refinancing sub- account to refinance an existing mortgage loan in step 200. In step 202, the current value of the home subject to the mortgage loan is determined, as well as the Total Credit Limit.

The loan application is then evaluated in step 204. The usual factors for determining credit risk and other relevant factors are used to evaluate whether or not the requested loan will be approved for the borrower. If the loan is not approved, the process ends at step 206.

If the loan is approved, the closing will occur at step 208. At the closing, the homeowner takes an advance under the refinancing sub-account of up to about 80% LTV to repay the existing mortgage loan. At the same time, the borrower establishes a facility under the home equity sub-account to obtain additional advances up to the Total Credit Limit (i.e., 95% LTV) less the outstanding balance on the refinancing advance under the refinancing sub-account (i.e. up to 80% LTV).

At any time after the closing, in step 210, the homeowner may take additional advances under the home equity sub-account against the Total Credit Limit. At step 212, the homeowner receives a single monthly statement which sets forth the total amount due under all active sub-accounts in the unified line of credit. In step 214, the homeowner makes a single monthly payment on the unified line of credit. Under this new mortgage loan product, the total amount due under all active sub-accounts will legally be one loan balance secured by the first lien on the home. Under the credit agreement, the lender makes available to the borrower a Total Credit Limit up to 95% LTV secured by a first lien on the property. At the time of closing, the borrower will execute a credit agreement and a mortgage or deed of trust. The mortgage or deed of trust gives the lender a first lien on the home. Lender's first lien on the home secures the payment of the total amount advanced under each of the sub-accounts in the unified line of credit.

The advance under the purchase money sub-account or refinancing sub- account is preferably limited to 80% or less of the home value. The borrower must take this first advance at closing to purchase a home or to refinance all existing debt secured by a home. The borrower will have 15 or 30 years to repay the advance under the purchase money sub-account or refinancing sub-account subject preferably to a fixed rate fully amortizing loan payment. The term of this sub-account begins at closing which is designated as the first advance date in the loan documents.

The remaining amount under the Total Credit Limit is available under the home equity sub-account as the borrower writes checks, preferably over a ten-year draw period. The borrower may write as many checks as desired, but the total amount outstanding under the home equity sub-account may not exceed the Total Credit Limit less the balance under the purchase money sub-account or refinancing sub-account. Preferably, each check will be at least $250.00. Balances created under the home equity sub-account by check advances will be subject to a variable rate of interest applied on a daily basis. The variable rate of interest would be based upon an index such as the prime rate of interest, plus a margin established at loan closing. Since the unified line of credit is revolving, repayments on the purchase money sub-account or refinancing sub-account or the home equity sub-account during the draw period, will make additional credit available. Accordingly, the total which may be drawn over the life of the unified line is not limited. During the draw period, borrowers may convert any variable rate balances under the home equity sub-account to fixed-rate term draws (the "fixed-rate conversion option").

During the draw period, the borrower will be required to make variable rate interest-only payments on the home equity sub-account balance. No principal payments should be required before the end of the draw period unless the borrower requests that the home equity sub-account be closed, or the loan is in default, or the borrower exercises the fixed rate conversion option, if available. At the end of the draw period, the home equity sub- account balance will enter the repayment period with equal monthly principal payments over a 15-year period. Interest on this balance will be payable on a variable rate basis each month during this repayment period unless the borrower exercises the fixed rate conversion option, if available.

Borrowers will preferably have an option to convert all or a portion of their variable rate balances under the home equity sub-account to an open-end fixed-rate, fixed term level-payment sub-account. A minimum conversion amount, such as $2,500, will be required. The fixed-rate sub-account will remain part of the open-end credit line. As the fixed-rate conversion balance amortizes it will free up available credit under the home equity sub-account during the draw period.

All check advances will post to the borrower's home equity sub-account. The aggregate balance of these advances will accrue interest at a variable rate applied on a daily basis as disclosed in the credit agreement. The daily interest rate on this sub-account balance will be set as of the first day of each statement period. As of the first day of each statement period, the Annual Percentage Rate and the Daily Periodic Rate will be based upon the highest prime rate most recently published in the Wall Street Journal's Money Rates section plus (or minus) a margin.

Preferably, the margin will be specific to each borrower as a function of the borrower's credit score and total LTV limit at the time of origination, and will be determined by the originating lender. The margin will be set using appropriate gradations (i.e., basis points or fractions of basis points).

Subject to applicable law, the account will be automatically frozen if the home value falls below a predetermined threshold and/or credit performance is unacceptable (as evidenced by loan delinquency or credit score deterioration).

The borrower will receive one monthly statement reflecting total account activity including a total account balance and a total payment due on the first of each month. Should the borrower fail to make the payment when due, or make a partial payment, the account will be considered late. For each statement period, the total finance charge due on the loan equals the finance charge for the purchase money sub-account or refinancing sub- account, plus the finance charge for the home equity sub-account, plus a finance charge for each fixed rate conversion (if any), plus any accrued and unpaid finance charge from a prior statement period.

Figs. 3 and 4 describe an example of a mortgage loan product and method for the purchase of a home and an example of refinancing an existing mortgage loan consistent with the present invention. In Fig. 3, the Jones family has applied with a lender for a unified line of credit to purchase a new home that is selling for $160,000. This home value has been confirmed by an appraisal required by the lender. According to a preferred embodiment of the present invention, the Jones family is eligible for a Total Credit Limit in the amount of

$152,000 (95% LTV or 95% of the $160,000 home value) provided the Jones family makes this minimum downpayment of 20% of the home value. In the current example, the Jones family pays a down payment of $32,000 (20%) and takes an advance of $128,000 (80% of the home value) from the Total Credit Limit to pay the remainder of the home selling price.

Of the Total Credit Limit, the Jones family has $24,000 available after the closing for future advances under the home equity sub-account to purchase, for example, home improvements. The Jones family may obtain home equity advances from this sub- account any time after the closing by, for example, writing checks. Balances created by checks drawn on the home equity sub-account will be subject to an adjustable rate of interest applied on a daily basis based upon an index such as the prime rate of interest plus a margin established at the loan closing. The borrower will receive a single monthly statement with a total payment due that reflects the advance under the purchase money sub-account and all subsequent advances under the home equity sub-account.

As further shown in Fig. 3, at closing the Jones family may elect to establish the Total Credit Limit based partly on the appraised value of the home plus an intended major home improvement project. Fig. 3 indicates that the Jones family intends to build a $40,000 addition to their home. The value added to the home by this project is determined either by (a) an appraisal of the new value of the home including the addition; or (b) adding 50% of the cost of the addition (i.e. $20,000) to the current value of the home. For purposes of this example, the value of the improved home is $180,000 employing either method.

The Total Credit Limit may be calculated based on the appraised value of the improved home. As before, the Total Credit Limit is calculated by taking 95% of the new home value. In this example, the Jones family is eligible for a Total Credit Limit of $171,000

(95% of $180,000). The purchase money advance of $128,000 is deducted, leaving $43,000 of credit in the home equity sub-account, which should be sufficient to cover the improvement project. The Jones family may write checks against the home equity sub- account as stages of the work are completed.

It should be appreciated that throughout the ten year draw period, the amount of available credit in the home equity sub-account will increase based on amortization of the purchase money sub-account balance. As shown in Fig. 3, the balance in the purchase money sub-account is amortized over an unspecified period of time by $1,000 to $127,000. Because of this reduction, the Jones family now has $44,000 of available credit under the home equity sub-account. Since the Jones family has already taken a home equity advance of $40,000 for the home improvement project, a total of $4,000 remains. The amount of available credit under the home equity sub-account will continue to increase as the balance in the purchase money sub-account is amortized. In addition, appreciation in the value of the home (as confirmed by the lender) may also increase the Total Credit Limit and in turn the amount of credit available under the home equity sub-account.

In Fig. 4, the Jones family has decided to refinance their existing first mortgage. The value of the home has been appraised at $160,000. The Jones family is also interested in establishing a facility for subsequent advances. Consistent with the present invention, the Jones family is eligible for a Total Credit Limit equal to 95% of the appraised home value or $152,000. As with the home purchase example, the Jones family may draw up to 80% of the home value against the Total Credit Limit in the first advance to repay the existing mortgage. Since only $112,000 is outstanding on the existing mortgage, the Jones family still has $40,000 available ($152,000 -$112,000) for subsequent advances under the home equity sub-account.

The Jones family may use the home equity sub-account to remodel their home, as described in Fig. 4. The Jones family may take advances under the home equity sub- account during the draw period by writing checks. The Jones family may write as many checks as desired, but the total outstanding balance of checks posted to the home equity sub- account may not exceed the Total Credit Limit less the balance due under the refinancing sub-account. Preferably, each check must be of at least $250.00.

When the remodeling is completed, the Jones family may decide to convert any portion of the variable rate balance on the home equity sub-account to a single fixed rate draw choosing a fifteen-year term as shown in Fig. 4. As the refinancing sub-account balance and the fixed rate conversion draw are amortized additional credit will be available under the home equity sub-account during the draw period.

The present invention thus provides a new mortgage product and method that allow a borrower to obtain a traditional mortgage loan to purchase or refinance a home combined with a home equity line of credit. A first lien on the home secures all advances for these purposes. The borrower receives a single monthly statement and makes one payment. It should be recognized that the present invention is not limited to the particular percentages discussed as examples herein.

It will thus be seen that the objects set forth above, among those made apparent from the preceding description, are efficiently attained and, since certain changes may be made in carrying out the above method and in the product set forth without departing from the spirit and scope of the invention, it is intended that all matter contained in the above description and shown in the accompanying drawings shall be interpreted as illustrative and not in a limiting sense.

It is also to be understood that the following claims are intended to cover all of the generic and specific features of the invention herein described, and all statements of the scope of the invention which, as a matter of language, might be said to fall therein.

Claims

CLAIMS What is claimed is:

1. A method for making available to a borrower a mortgage loan in the form of a unified line of credit secured by a first lien on a home comprising the steps of making available a total credit limit under said unified line of credit based on a determined value of said home, allocating as a first advance a portion of said total credit limit for one of at least purchasing said home and refinancing an existing mortgage loan on said home, and contemporaneously establishing for said borrower a facility to obtain additional advances in an amount up to said total credit limit less an outstanding balance of said first advance.

2. The method of claim 1 wherein the amount of said total credit limit and the amount of said first advance are set as percentages of said determined value.

3. The method of claim 2 wherein said total credit limit is set at a maximum of about 95% of said determined value.

4. The method of claim 2 wherein said first advance is set at a maximum of about 80% of said determined value.

5. The method of claim 1 wherein said borrower makes a cash downpayment equal to about 20% of said determined value.

6. The method of claim 1 wherein said facility to obtain said additional advances is in effect for a predetermined period of years from loan closing.

7. The method of claim 6, where said predetermined period is 10 years.

8. The method of claim 1 wherein a variable rate of interest accrues on said additional advances.

9. The method of claim 8 wherein said borrower has the option to convert all or a portion of any variable rate advances to a fixed rate.

10. The method of claim 1 wherein the amount of credit available for said additional advances increases as said first advance is amortized.

11. A method of financing the purchase of a home while contemporaneously establishing a home equity line of credit comprising the steps of making available to a borrower a line of credit with a total credit limit, based on a determined value of said home, secured by a first lien on said home, allocating as a first advance a portion of said total credit limit for the purchase of said home, and contemporaneously establishing for said borrower a home equity sub-account to obtain additional advances.

12. The method of claim 11 wherein said borrower may obtain said additional advances under said home equity sub-account up to the total credit limit less an outstanding balance of said first advance.

13. The method of claim 12 wherein the amount of credit available for additional advances under said home equity sub-account increases as said first advance is amortized.

14. The method of claim 11 wherein the amount of said total credit limit and the amount of said first advance are set as percentages of said determined value.

15. The method of claim 14 wherein said total credit limit is set at a maximum of about 95% of said determined value.

16. The method of claim 14 wherein said first advance is set at a maximum of about 80% of said determined value.

17. The method of claim 11 wherein a facility to obtain said additional advances under said home equity sub-account is in effect for a predetermined period of years from loan closing.

18. The method of claim 17, where said predetermined period is 10 years.

19. The method of claim 11 wherein a variable rate of interest accrues on said additional advances from said home equity sub-account.

20. The method of claim 19 wherein said borrower has the option to convert all or a portion of any variable rate advances to a fixed rate.

21. A method of refinancing an existing mortgage loan while contemporaneously establishing a home equity line of credit comprising the steps of making available to a borrower a line of credit with a total credit limit, based on a determined value of said home, secured by a first lien on said home, allocating as a first advance a portion of said total credit limit for repaying an existing mortgage loan, and contemporaneously establishing for said borrower a home equity sub-account to obtain additional advances.

22. The method of claim 21 wherein said borrower may obtain said additional advances under said home equity sub-account up to said total credit limit less an outstanding balance of said first advance.

23. The method of claim 22 wherein the amount of credit available for said additional advances under said home equity sub-account increases as said first advance is amortized.

24. The method of claim 21 wherein the amount of said total credit limit and the amount of said first advance are set as percentages of said determined value.

25. The method of claim 24 wherein said total credit limit is set at a maximum of about 95% of said determined value.

26. The method of claim 24 wherein said first advance is set at a maximum of about 80% of said determined value.

27. The method of claim 21 wherein a facility to obtain said additional advances is available for a period of 10 years from loan closing.

28. The method of claim 21 wherein a variable rate of interest accrues on said additional advances from said home equity sub-account.

29. The method of claim 28 wherein said borrower has the option to convert all or a portion of any variable rate advances to a fixed rate.

30. A loan product for financing the purchase of a home through a line of credit with a total credit limit based on a determined value of said home comprising a first loan component of which provides for a first advance for the purchase of said home, and a second loan component of which provides for subsequent advances being available to the borrower up to said total credit limit less an outstanding balance of said first advance, all said subsequent advances under said line of credit being secured by a first lien on said home.

31. The method of claim 30 wherein said total credit limit and said first advance are set as percentages of said determined value.

32. The method of claim 31 wherein said total credit limit is set at a maximum of about 95% of said determined value.

33. The method of claim 31 wherein said first advance is set at a maximum of about 80% of said determined value.

34. A loan product for repayment of an existing mortgage loan on a home through a line of credit with a total credit limit based on a determined value of said home comprising a first loan component which provides for a first advance being allocated for repayment of said existing mortgage loan; and a second loan component which provides for subsequent advances under said line of credit being made available to a borrower up to said total credit limit less an outstanding balance of said first advance, all said subsequent advances under said line of credit being secured by a first lien on said home.

35. The method of claim 34 wherein said total credit limit and said first advance are set as percentages of said determined value.

36. The method of claim 33 wherein said total credit limit is set at a maximum of about 95% of said determined value.

37. The method of claim 33 wherein said first advance is set at a maximum of about 80% of said determined value.