Betting on the Right Loan

Buyers Looking Only for the Lowest Payment Could Be Gambling With Their Future

Finding the right mortgage loan, like deciding on the right cell phone or the right digital camera, can involve way too many choices these days. The ads scream: Interest-only! No interest! Low, low introductory rates!

But the stakes are much, much higher when it comes to a home than when it comes to entertainment gadgets.

Knowing that your house is on the line if you take the wrong loan and can't keep up with the payments should be enough to get most of us to do our homework.

However, instead of asking questions about which loan best fits their financial situation, people in frenzied housing markets are leaping at the discount promises and then looking, consumer groups say. Those scrambling to get into a first home, to move up into an ever-more-expensive neighborhood or to grab a second home, and others who may simply be investors in search of the lowest monthly costs, often aren't factoring in anything but the initial payments, lenders say.

"People just don't listen to what they're getting when they hear loan offers today. They just want the lowest monthly payment," said Russell Rothstein of Beacon Mortgage in Rockville.

"The less educated they are, the easier it is for them to get taken advantage of," he said. "Plenty of educated people, depending on how busy they are," can also be misled by new loan types that might not be suitable, he said.

The problem, he and other brokers and lenders say, is how to get people to stop, look and listen.

Here's a guide to the new world of mortgage lending.

New Loans Complicate Process

· Interest-only mortgages. The most popular newcomers, interest-only loans, require payment of just the interest on the money borrowed rather than paying both interest and principal, at least at first. Monthly payments are lower than traditional long-term fixed-rate loans or ordinary adjustable-rate mortgages, known as ARMs, during the interest-only period, but rise sharply after the borrower starts paying off the principal. Another payment shock can come if interest rates spike at the same time.

· Option ARMs. "Payment-option" adjustable-rate mortgages, or option ARMs, are another popular choice, lenders say. These loans give borrowers several payment choices each month, including the choice to pay less than the interest owed.

If a borrower chooses to pay less than the interest owed, the result is a situation lenders call "negative amortization," which leaves the borrower owing more each month than was lent originally. If a borrower has to sell the house, he may owe more than the house is worth, even if home values have not fallen.

"Frankly we're a little concerned here about the popularity of the interest-only and no or low down payment loans," said Scott Walker of Alexandria Financial Associates in Virginia. "Everyone's situation is different, and they may be a good fit for some. But these kinds of loans can, I think, lead to people biting off more than they can chew."