Dream house with interest only,
Housing boom breeds new mortgage deals
By Thomas A. Fogarty, USA TODAY
usatoday.com
The booming home finance market has spawned an array of mortgage deals that are making it cheaper than ever to meet monthly house payments — at least initially. (Related story: Tips on making a mortgage work for you)
Over the past six months, lenders have flooded the market with deals permitting borrowers to make minimal payments, pay interest only, skip an occasional payment or draw against an equity line that grows automatically with the property value.
Tony Walcher, 37, took an interest-only mortgage to finance a new $390,000 house near Seattle. He won't pay principal for seven years. By then, the pharmaceutical company sales manager says he's likely to be rid of the new mortgage. He says he will have been transferred or will have refinanced. In the meantime, payments on his "dream house" will be hundreds of dollars less than with a standard mortgage.
Two groups are driving the change:
Borrowers. With their net worth inflated by skyrocketing property values, more homeowners want flexibility in their household budget, lenders say. "Everyone is attracted (to the new mortgages) if they view their house as a financial asset," says Harry Tomlinson of lender Washington Mutual.
First-time buyers can get more house for their money with discounted initial mortgage payments, he says. Well-to-do buyers can use the mortgages to free up income for other uses, often a second home or rental property.
Mortgage investors. Investors who generate the capital for mortgage lending view housing as impervious to the problems of the broader economy and have loosened lending rules, says Chris Larsen, CEO at Internet lender E-Loan. "Most of them are agnostic on whether it's good for the borrower or not," says Larsen, whose firm has offered interest-only mortgages for about six months.
Jennifer Scutti, a mortgage industry analyst at CIBC World Markets, wonders about the impact on delinquencies when some of the back-loaded costs of the new flexible mortgage deals hit home.
"What happens in three to five years when those mortgages reset and up the monthly payment by $1,000?" Scutti asks.
Lenders say greater flexibility doesn't mean credit standards are looser. "You still have to qualify," says Doug Perry of Countrywide Home Loans.
Mortgage rates have spiked from a recent historic low. Investment giant Freddie Mac said Thursday that the benchmark 30-year fixed-rate mortgage hit 6.31%, up from 5.98% two weeks ago — an apparent reaction to an improving stock market. But E-Loan's Larsen says he expects the hot refinancing market to merely go "from insane levels to brisk levels." |
