Betting on the Right Loan

· Forty-year mortgages. Loans that stretch the repayment period to 40 years from the traditional 30 years, but still offer a fixed interest rate, are also attracting some borrowers.

Forty-year mortgages have been around for years but drew little attention. They got a boost when Fannie Mae introduced a pilot program to buy them from credit unions a year ago. In June, Fannie said it would expand its purchases to all approved lenders. That has led some to speculate that the 40-year loan could take off if interest rates pop, because the loans appeal to conservative borrowers who might want to try an innovative product but shy away from those they perceive as risky.

The Mortgage Bankers Association says 40-year mortgages represent only 1 or 2 percent of loan originations and will never approach the other alternatives because borrowers have to pay thousands of dollars more in interest over the life of the loan.

But a lender in the pricey Cape Cod-Nantucket market in Massachusetts, who introduced a 40-year mortgage that resets to a new interest rate after 20 years, says consumers are responding. "Since we rolled it out a little more than a year ago, over 50 percent of our originations are 20/20 loans," said Michael Sinclair, vice president of the Hingham Institution for Savings in Hingham, Mass. "It's been very successful."

Red Flags Over Risks

Alarms are being raised nationwide about the risks of these new "exotic" or "specialty" mortgages because borrowers may not realize how much they will owe or may not want to consider the possibility that they are taking on too much house and that the rising prices of the past may not continue, consumer groups say.

Some of the most popular new loans limit monthly payments in the initial years but can require much larger payments later.

Among those waving red flags lately have been Federal Reserve Chairman Alan Greenspan, the Mortgage Bankers Association, the National Association of Realtors and the nonprofit Center for Responsible Lending.

Greenspan and the industry groups have taken particular care to explain that the new loans are not evil. They're often providing just what would-be home buyers want these days -- lower monthly payments that will let borrowers keep up with soaring prices.

Fannie Mae spokeswoman Sandra Cutts said about 60 percent of the loans on the West Coast are interest-only. In the Washington area, interest-only loans represented about a third of all mortgages written in the first half of the year, according to a survey by LoanPerformance, a San Francisco company that tracks loan originations.

The mortgage bankers' trade group also recently joined those cautioning borrowers to look before they leap.

Greenspan expressed concern this summer about the increase in such loans and suggested that buyers and investors may be using them for houses they really can't afford. He also warned borrowers and lenders that if interest rates jump or the housing market cools, "some households may have trouble meeting monthly payments."

The NAR and the Center for Responsible Lending last month said borrowers should take heed: Payments "could jump by as much as 50 percent or more when the introductory period ends," the groups said. They published a brochure explaining the pitfalls.