Homebuyers turn to alternatives for financing

April 10, 1994|By Ellen James Martin | Ellen James Martin,Sun Staff Writer

Until February, most homebuyers headed to lenders' offices with just one goal: a good old-fashioned 30-year, fixed-rate mortgage.

But with mortgage rates rising -- especially over the past several weeks -- buyers are increasingly examining other choices, with the encouragement of local lenders.

"Buying power is diminished by increased rates. So in order for the borrower to continue to purchase the home of his dreams, he has to pursue some more creative financing," said Bryna Rudzin, a Columbia-based loan officer for Lenders Financial Corp.

Buyers using 30-year, fixed-rate loans can qualify for less house today than they could nine months ago, so, to buy the same home, many are looking at alternative loans that start with lower rates but could be more expensive in the long run.

And lenders -- trying to lure borrowers who might not even look at a loan with a rate above 9 percent -- are pushing loans with lower rates but other less desirable terms.

For example, a lender might increase the points charged to keep the rate low or push 15-year loans, which generally have rates a half-point below those of 30-year loans but commit the borrower to higher monthly payments.

A weekly survey of lenders in the Baltimore area in August showed rates at 6.76 percent with the average lender charging about 1.5 points. The survey by HSH Associates of Butler, N.J., showed rates last week at 8.59 percent -- with lenders charging 1.65 points.

"There are a few major products now competing for attention with the usual fixed-rate mortgages," said Paul Havemann, a vice president at HSH. Among them are adjustable rate loans (ARMs), shorter-term fixed loans and the "two-step" loan, which has rates slightly lower than those of 30-year loans for the first five to seven years, then converts to a market-rate, 30-year loan.

A number of lenders also are seeking to appeal to refinancing customers with 15-year, fixed-rate mortgages.

"There's still that undercurrent . . . from people not caught in the headlong -- to refinance of the last couple of years," Mr. Havemann said. Refinancings accounted for 70 percent of the U.S. mortgage market last year, but their share has fallen to 10 percent to 15 percent, he said.

Several lenders, including NationsBanc Mortgage Corp., are promoting 15-year mortgages with a blitz of TV, radio and print ads.

The 15-year home loan appeals to the "people on the fence" who had been waiting for rates to creep down further when they began to move up, said Barbara Cox, a NationsBanc vice president.

The 15-year loan has a lower rate than its 30-year counterpart, but monthly payments are considerably higher. So some lenders, including Norwest Mortgage Corp., are pushing 20-year loans, which have lower rates than 30-year loans but lower payments than 15-year loans.

Norwest is also encouraging homebuyers to consider taking fixed-rate mortgages with a "buy-down" in the early years, said William Teal, the Timonium branch manager for Norwest Mortgage Corp.

By paying an extra point or two on the loan at the outset, the borrower can lower the rate for the first few years.


Some typical loans getting a new look from borrowers:

* The seven-year fixed-rate mortgage ("two-step" or balloon):

HOW IT WORKS: If the loan is a seven-year "two-step," it is a 30-year loan with an interest rate that remains fixed for seven years and then converts for the remaining 23 years to the prevailing rate for a 30-year fixed loan. If it is a balloon, the initial fixed rate stays constant for seven years. After that, the balance is due and the borrower needs to refinance. Typically, these loans are priced a half to three-quarters of a percentage point below the rate for a traditional 30-year fixed loan.

FOR WHOM: Someone who plans to stay in the house no longer than seven years and wants the predictability of a low, fixed rate. Young couples with cash flow worries and those who move often, such as military people, might benefit.

* The 20-year, fixed-rate mortgage:

HOW IT WORKS: Level interest-rate mortgage is paid off over 20 years. The interest rate is usually slightly lower -- perhaps a quarter point -- than that for a 30-year, fixed-rate loan.

FOR WHOM: People who are refinancing a 30-year loan and who don't want to stretch out the term of the mortgage. The mortgage could be suited for people over 45 who don't want to carry debt into retirement.

* The adjustable rate mortgage (ARM):

HOW IT WORKS: The first-year rate is set 2 to 4 percentage points below the rate for a 30-year, fixed-rate loan. After the first year, the loan adjusts annually with the market.

FOR WHOM: A borrower who needs the lowest possible qualifying payment to obtain the maximum possible purchasing power and who is willing to shoulder the risk of an interest rate increase.

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