Betting on the Right Loan

Another good candidate for an interest-only loan, said Daniel Rebibo of Mortgage One Inc. in Rockville, "is someone who can afford anything they want" and chooses not to pay principal because he wants to invest the savings.

"Rather than paying $3,000 a month for a mortgage and reducing their debt, a borrower may hear suggestions from a financial consultant to pay only $2,200 and invest that $800 somewhere else, like in a self-employment IRA or in buying a property here or there," Rebibo said.

Beatriz Yanovich, a Montgomery County real estate agent, fits the interest-only profile. She and her husband refinanced their Potomac home last month from a 30-year loan to a 10-year interest-only loan through Rebibo's company because Yanovich anticipates that her sales commissions will allow her to pay off the interest early and to apply money to the principal.

"If you think that five years down the road you'll be making the same income . . . this is not for you," said Yanovich.

Walters said interest-only loans have "been taking a lot of broadside shots in the media" but have pluses. A bigger question, he said, is whether borrowers taking advantage of such loans are disciplined enough to make good use of the savings. "If you run out to a casino and blow it" or run up credit card bills, "you lose. If you make good choices, you win."

Rebibo said he "personally does not like the interest-only product, because how do you guarantee that the property will go up in value in the coming year?" Also, he said, lower-income, credit-challenged borrowers are too often enticed into taking loans for more than they can afford.

Mike Calhoun, general counsel for the Center for Responsible Lending, said home buyers "should be cautious about accepting a mortgage they can't afford. These mortgages can be devastating for families who are stretching their budget to buy a home."

Dick Ueltschi, a retired government contractor in Centreville, recently refinanced his home with a five-year interest-only ARM. The barrage of come-ons for new loans, he said, can be "absolutely mind-blowing."

"I got a call about a year and a half ago . . . and I asked the guy all sorts of penetrating questions, I thought."

Then he spoke with a mortgage broker he had worked with before, Paul E. Skeens of Carteret Mortgage in Fort Washington.

"When I called Paul and said, 'Here's what he offered me,' he knew the product and what the potholes were in it."

Skeens told him an interest-only ARM was a bad idea, "till you can say for sure that you're going to be in the house for less than five years," Ueltschi recalled.

But a week ago, after Ueltschi could make that promise, Skeens gave him his blessing. Now, the retiree says he is using the money he is saving on the monthly mortgage to pay off a lot he bought at Wintergreen and to save for a new condo at Hilton Head.

Skeens said, "The basic rule that people follow today is 'What's my lowest possible payment?' and we'll worry about the loan amount later."

But by making "tiny little payments" to get into a house they can't really afford, he said, "they're basically mortgaging off more than their payments, they're mortgaging off their future equity."