Targeting A Great Home Loan

Innovation: New sophisticated financing has allowed people to buy more and bigger homes.

April 17, 2005|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

As soon as the for-sale sign went up in their neighborhood, Bryan and Danielle Lopez knew immediately that was the house they wanted.

Figuring out the type of mortgage to get was another matter.

The Sparks couple initially leaned toward a traditional 30-year fixed-rate loan. But after weighing their cash flow, how long they plan to live in the house and the fact they have a baby on the way, the pair chose an interest-only loan. By paying only the interest on the 6 percent loan for the first seven years, the couple's monthly payment will be $200 less than if they went with the traditional fixed-rate loan.

"It gives me an opportunity to take lower monthly payments" yet put money toward the principal at any time, said Bryan Lopez, 28, a computer sales representative who works on commission and sees paychecks fluctuate. It also will free up extra dollars for diapers and baby food, he said.

Today's mortgages are not your parents' mortgages. Of course, the traditional fixed-rate loans remain popular, but a variety of adjustable-rate products have sprung up during the past few years. As housing prices continue to skyrocket, financing has become more sophisticated, allowing more people to get into a home or into a bigger house than they would have been able to afford under a traditional mortgage.

While flexible loans and repayment plans can increase homeownership, there also is the risk that families may get in over their heads if their fortunes turn south, interest rates jump or if the housing market stalls or falls. In the latter case, it would be possible for a homeowner to owe more on the house than it's worth.

"People are gambling today and have come to expect, like they did with the stock market in the 1990s, that there is only one direction for prices to go," said Keith Gumbinger, vice president with HSH Associates, a mortgage information provider in New Jersey.

To determine the best mortgage for them, homebuyers need to weigh a variety of factors, including how long they expect to be in the home, where they expect interest rates are headed and how much risk they are willing to take.

"There are probably 350 kinds of loans out there," said Doug Duncan, chief economist with the Mortgage Bankers Association.

Here are a handful of options that are attracting the most attention from buyers today:

Thirty-year, fixed-rate. It's the mortgage most consumers are familiar with and remains the most popular. About 65 percent of mortgages today are fixed-rate, and most of those are 30-year loans, experts said.

Homebuyers like them because there is no mystery to what their monthly payment will be for decades to come. And while they will pay a higher interest rate for this peace of mind, the rates today still are attractive, experts said.

The average rate for a 30-year fixed-rate loan last week was 5.91 percent, according to a weekly survey by mortgage giant Freddie Mac. The 15-year fixed rate stood at 5.46 percent last week.

A fixed-rate loan is best-suited for those who know they will live in the house for a long time, say, more than seven years, said Barry Glassman, a financial planner in McLean, Va.

Linette and George Maldonado opted for a 30-year fixed rate loan to finance their move from a townhouse to their four-bedroom dream home in Ellicott City.

"We know the interest rates will go up; it's a matter of time," said George Maldonado, a minister.

Adjustable-rate mortgages. These mortgages have been gaining market share in the past couple of years. They now account for about 35 percent of new mortgages, compared with the 15 percent to 20 percent historical norm, experts said.

With an ARM, borrowers essentially get a fixed rate for a certain time, and then it's periodically adjusted depending on rates in the marketplace.

ARMs come in many forms. A one-year ARM, for example, would have a fixed-rate for 12 months, and then adjust annually.

How high the rates can be adjusted depends on the loan terms. ARMs typically set caps on how much rates can move during each adjustment period and over the life of the loan. Often rates can't swing more than 2 percentage points during a regular adjustment and no more than 5 or 6 percentage points total over the loan's life.

Because of the variable-rate feature, a homeowner's monthly payments can fluctuate over time. And because of that risk, ARMs tend to have lower initial rates than a fixed-rate mortgage. The rate on a one-year ARM, for instance, averaged 4.3 percent last week, Freddie Mac reported. Rates have been heading up since last year when the 1-ARM was at 3.65 percent.

The most popular ARM these days is the so-called 5/1 hybrid, according to HSH. The interest rate is fixed for five years and then annually adjusted. A five-year hybrid ARM averaged 5.31 percent, according to Freddie Mac.

Check the rate caps on hybrids, though. The first rate adjustment sometimes can be as much as 5 percentage points, the same as the life-time cap, experts said.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.