Hybrid mortgages. “We’re seeing tremendous interest in fixed-adjustable loans,” says Doug Perry, vice president of production, Countrywide Home Loans, in Calabasas, California. “They offer a fixed rate for three, five, seven or 10 years, after which the rate adjusts every year.” Thus, borrowers have some security, knowing that their monthly
payments won’t increase for a certain number of years, as well as a lower rate. Choosing a three- or a five-year hybrid mortgage (the most popular types) could shave 0.5% to 0.65% from a 30-year fixed mortgage rate. A hybrid mortgage can help home buyers buy more house than they would otherwise qualify for, with the expectation that future increases in the buyer’s income will cover interest-rate hikes.
A hybrid loan appealed to Stan Carter, 37, and his wife, Amey, 32, both teachers in Montgomery, Alabama. “We shopped around and wound up with a three-year ARM,” says Stan, “because the rate was attractive.” The Carters paid one point [see sidebar for an explanation of these upfront fees], “and got a 6.5% loan. After three years, the loan can go up by as much as 1% per year, but no more than five percentage points over the life of the loan.” With a loan of over $190,000 from Countrywide, the Carters were able to move into a $200,000 house in Montgomery.
In terms of what’s most attractive to home buyers right now, “we’ve seen fixed-rate mortgages go from 90% to 70% of the overall market,” says Gumbinger. “Adjustable-rate loans, especially hybrids, are becoming more popular.” In fact, according to the Mortgage Bankers Association, 28% of all loans made in the third quarter of last year were adjustable-rate loans (up from 12% for the
same period a year ago). “However, an 8.3% rate on a 30-year mortgage is not the end of the world, so there are plenty of takers out there,” he says. (For more on today’s mortgage choices, see “Playing the Mortgage Game” in Moneywise, this issue.)
STEP TWO: SEPARATE THE GIMMICKS FROM THE GOOD DEALS
In addition to the mortgage products listed above, lenders have rolled out other options designed to take the sting out of high rates. However, these alternatives-which include 40-year fixed-rate mortgages and negative amortization loans-earn few kind words.
“Forty-year mortgages are a tough sell,” says Gumbinger, referring to loans that stretch payments out over an additional 10 years. “They don’t save borrowers very much on monthly payments, but they add on 10 years of interest.” For example, on a $100,000 loan at 8.5%, you’ll pay $177,064 in interest over a 30-year period, but $252,250 over 40 years-an additional $75,186. Similarly, with negative amortization mortgages, you pay a lower “teaser rate” for the first few months, but your debt keeps building up.
On the other hand, Gumbinger is not as concerned about the trend toward smaller down payments. “Instead of the traditional 20%, we’re seeing lenders who require only 5% or 10% down,” he says. “In fact, in some cases it’s possible to borrow 103% of the purchase price, with the lender