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Choices, choices, choices

The booming housing market makes alternative financing options more popular. Even if they are a little more risky.

By HELEN HUNTLEY and JEFF HARRINGTON
Published July 31, 2005

Defazeo Fields and Caleta Scott hope to have a home of their own by the time they get married in January. That's why they've been spending the summer house hunting and mortgage shopping.

"In my vision of the American dream, home ownership plays a big part," said Fields, 28, an insurance specialist with State Farm. But the dream and the reality aren't easy to put together, especially since they don't want to borrow more than $200,000.

In this era of fast-escalating home prices, more home buyers are branching beyond traditional fixed-rate mortgages to breach that affordability gap. No-down payment and interest-only deals are tempting because they make houses more affordable initially, but they have the potential to backfire if interest rates rise. Or if home values don't.

On a $200,000 loan, the monthly payment can vary by hundreds of dollars depending on the type of loan, and making the right choice can be tough.

Most buyers opt for a traditional fixed-rate mortgage, usually one that pays off the purchase over 30 years. But as prices have risen, financing alternatives that offer lower monthly payments have become a lot more attractive.

Jarrell Britts, president of Eagle Title in St. Petersburg, said he took out an interest-only loan and recommended one to his daughters. During the first several years of an interest-only loan, the buyer doesn't pay down any of the original loan amount.

"Interest-only is really not a bad loan," said Britts, 52, who figures he won't stay long in the home he bought last year. Daughter Kelly Cressman, who runs operations for Eagle Title, sees interest-only borrowing as an investment tool. She and her husband, Peter, who manages a bar they own, bought a $625,000 house in Seminole three months ago with no down payment.

"We weren't looking to move, but we found a house on the water and decided we'd do anything it cost to get it," she said. Their payments are about $4,000 a month. Like a lot of buyers, they're counting on rising property values to build equity for them.

At Market Street Mortgage in Clearwater, interest-only loans account for 15 to 20 percent of the volume, chief executive Randy Johnson said. He said buyer enthusiasm has waned for standard adjustable rate loans, which have payments that include interest and principal. Once accounting for about a third of the closings, that's dropped to about a fifth, he said.

Johnson said the company stays away from the riskiest loans - those that have such small monthly payments they don't even cover all of the interest charges. However, other lenders offer them, giving buyers the option of very small payments in the beginning. The downside is that the unpaid interest is added to the mortgage balance and homeowners could end up owing more than the house is worth.

To remain competitive, lenders have become increasingly aggressive in the types of loans they offer and in the documentation of income and assets they require. No-down payment loans are common, typically packaged as an 80 percent first mortgage with a 20 percent home equity loan to seal the deal. As a result, many home buyers have no equity to start and aren't building any with their mortgage payments.

Financial planners worry about whether people will be able to afford to stay in the houses they are buying.

"A lot of people are getting overextended," said Steve Athanassie at Trademark Capital in New Port Richey. "They think "instead of a $300,000 house, I can afford a $500,000 house,' but they don't factor in that taxes are higher, maintenance is higher, utilities are higher."

He said an interest-only loan might be a smart choice for a person with fluctuating income who has the discipline to make payments on the principal when bonuses come in and who has other assets to fall back on. It's a high-risk endeavor for someone with few other assets or a shaky job situation, he said.

Clearwater financial planner David Lough said an interest-only loan might make sense for an investor looking for maximum leverage, but for most people he recommends a 15-year fixed mortgage than can be paid off by the time retirement rolls around.

He and others point out that the fixed-rate payment that's higher in the beginning could be lower in the long run if rates increase since payments on adjustable rate mortgages will rise.

"We're still in a low part of the interest-rate cycle, so why not lock in a permanent rate?" said Tampa financial planner Laura Waller.

That approach appeals to lots of home buyers.

"I'm not a person who's really a high roller when it comes to ARMs and interest-only loans," said Richard Ghent, who recently bought a home in South Tampa. "I'm pretty conservative and risk averse."

A 30-year fixed-rate mortgage was the obvious choice for Ghent, who works for a fertilizer company at the Port of Tampa, and his wife, Karen, a pharmacy technician.

Fields said a traditional 30-year fixed mortgage is his preferred option. He is looking seriously at one of those no-down payment loans, but considers an adjustable mortgage too risky since he thinks interest rates are likely to go up.

"I'd rather lock in the rate," he said. "And I don't think the housing market is going to keep going as strong as it is. I don't want to be stuck somewhere down the road."

Mortgage delinquency rates remain low. That can be attributed at least in part to the fact that low interest rates make it easy to refinance and the hot housing market makes it easy to sell property at a profit if homeowners are having difficulty making their payments.

Federal Reserve chairman Alan Greenspan and other economists have raised concerns that the popularity of interest-only loans could threaten the health of the banking system if buyers walk away from their loans.

Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230. Jeff Harrington can be reached at harrington@sptimes.com or (813) 226-3407.

[Last modified July 29, 2005, 18:24:03]