By Benjamin Levisohn
New York Daily News
Saturday, June 23, 2007
NEW YORK -- The way lenders help us buy homes has gotten a lot more confusing since the housing boom and the subsequent bottoming out. For a potential home buyer, the financing options can be bewildering -- and mortgage misinformation doesn't help.
If you're a potential home buyer, you know about the time-honored, 30-year fixed-rate mortgage. You know about risky subprime mortgages that have hurt mostly low-income homeowners nationwide. In between, there are other, once-unconventional mortgages that sometimes get a bad rap. Choosing one can save you -- or cost you -- a fortune.
"The majority of people don't realize that the right interest rate in the wrong product can cost them tens of thousands of dollars over time," said mortgage broker Lynn Rogers.
The 30-year fixed is the granddaddy of mortgages. It's simple: Get a good interest rate, send 360 payments to the bank and the house is yours.
But you can get a lower payment with adjustable-rate and interest-only mortgages, at least in the beginning. That can work for you in many circumstances, but be sure you know what you're getting into. When the initial term ends, you could see payments spike unless you refinance, adding another expense. If your house has lost value, you've really got a problem.
But adjustables make sense for borrowers who know they may need to move in, say, five years, or think they can refinance at in a better rate later on.
The loan in which monthly payments are guaranteed to spike is the interest-only loan. The borrower pays only interest -- no principal -- for a term, usually five or 10 years. That keeps the payment low. But when that term is up, interest and principal are due for the remaining term. Interest-only loans also come in the adjustable variety, meaning the rate you pay at the beginning may change.
However, an interest-only loan can work out quite well if a homeowner intends to move or refinance, or if property values rise.
The home loans that have made headlines in recent months, subprime mortgages, are defined by the borrower's credit, not necessarily the terms of payments. But even subprime mortgages have their uses.
Subprime loans help people with poor credit buy homes, such as those who missed payments in the past or maxed out their credit. Perhaps they've recently emerged from bankruptcy.
"The subprime borrower as a group has a history of not making timely payments," said Steve Habetz, president of Threshold Mortgage.
Borrowers typically get an initial teaser rate lower than prevailing rates. They must keep up with payments and improve their credit score so they can refinance when the initial rate expires or face higher payments, sometimes much higher.
Even then, prepayment penalties, which are fees charged to get out of a loan before its term ends, can make it nearly impossible to get new financing. Declining home values can do the same.
Experts generally agree that the 30-year fixed rate is the safest choice because its predictability is rock-solid. But that doesn't mean other mortgages might not make more sense.
Talk to a financial adviser, read the disclosure forms and get a second opinion -- or more.
Tamara and David Lowin explored their options. In their early 30s, they expect the next 10 years to be full of changes. The couple wanted to lock in an interest rate while they were near all-time lows. That meant getting a 30-year fixed rate.
But they wanted to buy an apartment that would be large enough for the family they're planning to start. They needed the flexibility to make lower payments if one of them wanted to be a stay-at-home parent.
When the Lowins went to finance their new Brooklyn apartment, they chose a 30-year fixed mortgage with a twist. They've locked in their rate of 6.25 percent, but will make only interest payments for the first 10 years.
"I want to sleep at night," Tamara Lowin said.
Elaine Boxer, 33, and boyfriend David Sturek, 36, don't know how long they'll be in the upper West Side apartment they just bought, but they financed it with an adjustable-rate mortgage anyway. They looked at a conventional mortgage but couldn't resist a loan with a rate a half-point lower.
They'll have that rate for seven years, then it will switch to the market rate unless they refinance. It could be lower, but most likely will be higher. In the lending world, that's known as interest rate risk.
"We are not using this ARM as a means to take on more debt than we really should, or to postpone an inevitable financial reckoning," Boxer said.
"We are choosing an ARM because, for our specific situation, it got us the best rate. Based on our financial status, both current and projected, we know what we can and can't handle," she added.
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