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Betting on the Right Loan
Choosing the Right Loan
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The new alternatives are not risky for all borrowers, the lending and real estate groups say.
Among those who might benefit, according to lenders:
· Financially savvy borrowers who understand they may not be building equity and who choose to invest their monthly savings.
· Those who anticipate having higher income in the future to offset the higher payments.
· Those who expect to move before a short-term ARM adjusts.
"The two big questions," said Bob Walters, chief economist of Quicken Loans, are "how long are the borrowers going to be in the home and what is your objective?"
He said, "If the borrower is going to be in the home less than five years, it makes no sense to take a fixed-rate loan. Why pay interest for protection that you don't need?"
If the objective is to "pay the loan off as fast as you can with the lowest interest rate and not take on interest rate risk," then a traditional fixed-rate loan is a better fit, he said. "If your goal is to keep your payment as low as possible, then other products come in, like the interest-only loan."
If a borrower intends to move soon, an adjustable-rate mortgage with lower interest rates is the choice, said Janice Burgess of the Virginia Housing Development Authority. Her agency is offering a 30-year loan with a five-year interest-only period to eligible lower- and middle-income families. Maryland's Department of Housing and Community Development also offers 35- and 40-year loans with initial interest-only periods.
Burgess said, though, that borrowers should plan for the day when the real bills start to come due. "If you're going to be in a house longer than the interest-only period, you need to feel comfortable that your income is going to increase so that you can absorb the payment" when the principal gets added in.
"If you are in a market that is realizing significant appreciation, you may feel comfortable" that the value of the house will increase over the interest-only period and that it will be possible to refinance into a better loan, she said. "But if you're in a market that is not appreciating significantly, you will probably want a traditional loan."
Interest-only loans are particularly attractive to those who are paid by commission or in bonuses, because their income is erratic, Burgess said. In a slow period, they can come up with the lower payments. When they get bonuses, they can pay down the interest-only amount, reducing that loan, and pay down the principal, she said.
