No matter what the price of a new home, the size of the down payment or the mortgage interest rate, the typical home buyer's No. 1 concern is the amount of the monthly mortgage payment.
"Potential home buyers realize that interest rates above 10 percent are here to stay. And while some have the money to make the down payment, they find that with inflation they are squeezed on the monthly payments," said BRUNO pasquinelli, president of the Home Builders Association of Greater Chicago.
This is the real threat to the home-buying consumer and the housing industry -- a 'cash-flow crunch'-- the amount of the monthly payment," Pasquinelli said.
A glance at what has happened to mortgage interest rates in the last year vividly illustrates the problem.
If a buyer of a $100,000 home made a 20 percent down payment a year ago, he or she could have obtained a mortgage at 10 1/4 percent. That would have resulted in monthly principle and interest payments of $720.69 for an $80,000 mortgage for 29 years.
If a home buyer is charged about 12 1/2 percent interest for a home mortgage, an $80,000 mortgage for 29 years at 12 1/2 percent interest requires monthly payments of $856.60, or nearly $136 a month more than a year ago. Figure about $200 a month for taxes, insurance and utilities and the total basic home ownership costs soar past $1,050 a month.
If a lender insists that a family spend no more than 25 percent of its income for basic housing costs -- a common rule of thumb in the lending industry -- a family income of $50,000 a year is required to meet such payments.
Should the family be able to get by with a $50,000 mortgage (by buying a less expensive house or making a larger down payment), it still would be faced with monthly mortgage interest and principle payments of $535.38 at today's rates. If the total basic home ownership costs came to, say $700 a month, the family would need a yearly income in exess of $30,000.
Even the latter figure would price many young couples out of the single-family home market.
"It is time that mortgage lenders promote alternate financing methods that result in lower monthly payments, particularly in the early years of a mortgage," Pasquinelli said.
"Over the years, mortgage lenders have lengthened the term of the mortgage and lowered the down payments about as far as they can prudently go.
"So it is now time to change the amortization, or monthly payment, schedules. By doing so, borrowers would pay less per month initially and more at a later date, when they can better afford higher payments," he said.
Obtaining such a mortgage would be akin to purchasing term life insurance, in which premiums generally rise in later years.
"The major and most important difference is that the homeowner would be building equity, while term insurance carries no equity unless it is converted," Pasquinelli said. "We need to re-establish that home ownership is a fundamental right for Americans. The tools are there, and all that is needed is to increase the availability of alternative financing methods and to make the public aware of the availability of such loans."
Pasquinelli outlined two types of such mortgages that have been approved by the Federal Home Loan Bank Board, which regulates the savings and loan industry:
Flexible Payment Plan. This program provides a payment schedule that varies rather than remaining at a fixed level as conventional mortgages do. It calls for repayment of interest only for up to five years, followed by level payments sufficient to amoritize the outstanding indebtedness over the mortgage term.
Critics of this type of mortgage argue that interest-only payments do not reduce the monthly payments sufficiently to make a major difference to the borrower. But Pasquinelli said that with interest rates above 10 percent, a flexible payment mortgage can result in monthly "savings" of 5 to 10 percent for the borrower.
Graduated payment mortgage. This plan is meant to serve the young, first-time home buyers who anticipate an improvement in their income but who need a lower monthly payment initially to qualify for a mortgage. The monthly payments start at low level and gradually rise at a pre-determined rate.
The federal Home Land Bank Board is considering another type of alternative financing -- the renegotiated rate mortgage -- which would make more funds available for mortgages but would not necessarily give a financial break to the home buyer.
Under the proposal, the payments on a mortgage would be renegotiated every three to five years to reflect current interest rates. If the borrower didn't like the new rates, he or she could attempt to obtain a loan from another source. Interest rate increases would be limited to 5 percentage points during the life of the mortgage.
Critics contend that type of mortgage could result in borrowers being faced with higher mortgage payments everytime the rate is renegotiated.