The latest move in the direction of pliable financing is Fannie Mae's "power payment" mortgage, a pilot project first reported by columnist Ken Harney last week. The essential idea is that every so often, twice a year and up to 10 times during the loan term, you can skip a payment and not incur a late penalty or credit-report black mark.

A loan where borrowers can skip a payment every so often has a lot of attraction -- say those months when bills pile up or there's a financial emergency. The monthly interest not paid is simply added to the mortgage balance.

In fact, I actually have such a loan. As one of my lenders -- Home Savings of America at the time -- wrote: "Because of the excellent credit history you've established with us, we're offering you an opportunity to take a one-month vacation from making your mortgage payment. It's called "Skip-A-Payment," and it's a great way to free up some money just when you need it for some other special use...."

The date of the letter? November 27, 1992.

A payment skipping plan has benefits for both lenders and borrowers. For lenders, the major advantages include:

• Giving borrowers a reason to keep existing loans even when rates decline, thus reducing portfolio churn.

• Encouraging persistency; that is, keeping loans outstanding for as long as possible, another value lenders like.

• Increasing portfolio size -- when a payment is skipped the loan balance is increased and the loan size increases. Have a thousand borrowers skip a monthly payment and you've created the equivalent of several new mortgages with little cost or hassle.

Not only can lenders find benefits with payment skipping mortgages, borrowers can also come out ahead. If you're a borrower, a payment skipping option means greater financial flexibility. You'll be able to borrow more without a new closing -- in effect, a loan modification. Most interestingly, there is the possibility that you might actually save money.

So how can you increase mortgage debt and save money? The answer is to look at all obligations.

In the case of a $100,000 loan at 6.5 percent interest, the monthly cost for principal and interest over 30 years is $632.07. In the first month, that payment is equal to $541.67 for interest and $90.40 for principal. Skip the first payment and $541.67 in upaid interest will be added to the loan balance.

In other words, skipping a payment defers current costs but also creates additional debt, thus payment skipping is not an option to be used lightly, especially if local home values are steady or falling.

That said, if you take your $632, don't pay your mortgage, and instead reduce your 18-percent credit card balance by the amount of your loan payment, you still owe creditors $632 but your overall interest costs have been reduced.

Paying down credit debt should be seen only as "step one." In the best case there is also a "step two."

Repayment terms for credit cards generally have an interest rate and a higher monthly cash cost than mortgages. For instance, if you borrow $632 over 30 years at 6.5 percent for a mortgage, the monthly cost for principal and interest would be $3.99. A credit card might require a monthly payment equal to 2 percent of the $632 outstanding balance -- $12.64 in this case.

Does your mortgage allow pre-payments in whole or in part at anytime and without penalty? If yes, apply the $12.64 monthly credit card savings to your mortgage and the $632 debt will be re-paid in 58.47 months. Keep paying an extra $12.64 or whatever and your mortgage will be paid off that much faster.

So here's the idea: If you have a payment skipping mortgage, that's great -- you now have a new financial tool. Pay down credit card debt with your skipped payment, tear up all but one credit card, do not build up a new credit card debt, and take the cash savings from the money no longer required for monthly credit card and use it to pre-pay your mortgage.

You'll save twice -- first by lowering or ending credit card debt and then by prepaying your mortgage to cut long-term interest costs.

It would be great if Fannie Mae's pilot project evolved into a standard loan product or if the idea was simply adopted more widely by lenders. Payment skipping has been around for at least a decade, it's a clever concept, and it provides benefits for both lenders and borrowers. In the world of mortgage financing, that's about as good as it gets.

For more articles by Peter G. Miller, please press here.

Published: October 22, 2002

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .