Buyers who until recently could finance their homes much as their parents did -- with a fixed-rate, 30-year loan -- now face a bewildering and often treacherous array of so-called creative financing techniques designed to qualify them for mortgage loans.
In recent months builders, developers and homeowners have discovered that virtually the only way to sell a house is to "buy down" the interest rate -- that is, to pay part of the buyer's interest costs by depositing several thousand dollars in a separate bank account.
In some cases, they subsidize the rate for only the first few years of a 30-year loan, after which the buyer's monthly payments suddenly jump to the full 18 or 19 percent rate. But a growing number of sellers are offering short-term "balloon" loans, in which the entire balance of a mortgage -- the "balloon" -- comes due in three to five years.
Since the buyers then must refinance the entire mortgage at the prevailing market rate, they are gambling that interest rates will fall before their "balloons" come due. If the gamble doesn't pay off, they face losing their homes or being saddled with sharply higher monthly payments.
"The risk is entirely on you," said Stephen Cox, senior vice president of B.F. Saul Co., one of the Washington area's major mortgage firms. "We may not be in a position to refinance it in five years and you may have to refinance it yourself. The buyer is trading off the certainty of a 30-year mortgage for having a lower rate today."
"If the rates are outrageous in five years," added Thomas Bonorden at Washington Federal Savings and Loan, "it's possible we'll have a lot of property on our hands."
Some of the other new financing arrangements also carry considerable risks. The latest offering on the complex mortgage menu is the adjustable rate mortgage (ARM), whose interest rate rises and falls with a variety of indexes. Some banks adjust the rates yearly while others raise or lower them every few months.
And while some tie their interest charges to six-month Treasury bills, others base the payments on their own cost of borrowing, a more volatile measure that may be more beneficial to the bank than the home buyer.
Still others are offering graduated rate mortgages, in which the monthly payments are lowered for the initial five years to enable the customer to qualify. Home buyers who take this bet are gambling that they will be able to handle steeper payments in the future.
It's little wonder that area bankers say most would-be home buyers remain wary of these complicated arrangements.
As though this weren't enough of a problem, many home buyers are learning that banks no longer allow them to assume an owner's existing mortgage, which may be at now-unheard-of rates such as 8 or 9 percent. Some lenders are compromising, offering new loans at, say, 13 percent, just to get a deadwood 8 percent mortgage off their books.
The Federal National Mortgage Association, or Fannie Mae, which buys mortgages from lenders, recently gave an encouraging boost to the new arrangements by agreeing to purchase bought-down mortgages as well as adjustable rate loans.
Many Reagan administration officials say the new "All Savers" certificates, which offer consumers $1,000 ($2,000 for married couples) in tax-free interest income over the next 15 months, will enable savings and loans to pump billions of dollars into new mortgages. Toward that end, Fannie Mae recently announced some new incentives to make it more profitable for savings and loans to channel their All Savers cash into home mortgages.
But some financial experts say the plan is too little and too late. "No S&L in its right mind is going to invest that money in long-term mortgages, or even five-year mortgages," said New York investment economist David M. Jones. If he is right, thousands of borrowers may lose their high-stakes gamble that mortgage rates will come down any time soon.