Corrections or additions?
This column by Kathleen McGinn Spring was prepared for the January 4,
2006 issue of U.S. 1 Newspaper. All rights reserved.
Real Estate Notes
After three years of stratospheric price increases and heated bidding
wars, the Princeton area real estate market may be leveling off. "It’s
almost normal," says veteran mortgage broker Frank Mancino. "There’s
not a bidding war on every house." Prices are still high – and rising
at least a little – but quite a bit of helium has been let out of the
Mancino (firstname.lastname@example.org) is associated with Gateway
Funding at 850 Bear Tavern Road. He says that what is rising is the
cost of owning a home. A series of small hikes in short term interest
rates by the Federal Reserve has brought the rate on a 30-year fixed
rate loan to somewhere between 6 percent and 6 1/8 percent. While
still not close to historic highs, these rates have occasioned a big
change in the type of loans he is writing.
"There is less enthusiasm for refinancing and for home equity loans,"
he says. The purchase market, meanwhile, remains strong. But buyers’
borrowing habits are changing.
"ARMs (adjustable rate mortgages) were red hot," says Mancino. But now
the old standby, the 30-year-fixed mortgage has regained the top spot.
The reason, he explains, is that rising short-term rates mean that the
interest rate on an ARM is very close to that on the fixed-rate loan,
and the ARM carries far more risk. There is still uncertainly as to
where interest rates are heading, and if history is any gauge, the
upside risk could be substantial.
While the 30-year fixed rate loan has been around for generations, it
now comes with a new twist. "The hot product now is the interest only
30-year fixed rate mortgage," says Mancino. Interest only loans have
been gaining in popularity for several years, but until recently most
were designed so that there was a three-year or five-year interest
free period before amortization at an adjustable rate kicked in. The
initial rate was very low, but it could climb substantially.
Now borrowers can lock in the current interest rate for the whole
30-year term. Typically, says Mancino, the borrower pays only interest
for 10 years, and then begins to repay the principal in the 11th year.
On a $400,000 loan at 6 percent, payments would be $2,000 for the
first 10 years, and then would jump to $2,865 in the 11th year, and
would remain there throughout the life of the loan. The same $400,000
loan amount with a straight 30-year fixed rate mortgage would carry
payments of $2,398 for the life of the loan.
"If the borrower goes with the interest only loan, he saves almost
$400 a month, and that’s significant," says Mancino. About 25 percent
of the loans his office is now writing are for interest-only
mortgages. Nationwide, he says, 40 percent of all loans are
interest-only. Borrowers generally go with the loans because they want
the most house they can possibly get. If they find themselves with
surplus cash, they are generally free to make principal payments at
any time to reduce the loan amount and the amount of future payments.
Rather than working to reduce principal, however, many of these home
buyers are planning an early exit from the mortgages. In nearly every
case they expect to be out of the loan before the 10-year interest
free period is over, Mancino finds. "They expect to sell the house or
refinance it," he says. The interest free loan is such a new product
that no one is sure how this strategy will work out, he adds.
Beyond deciding on the length of the loan, whether or not to go with a
fixed rate, and the pros and cons of an interest-free loan, borrowers
have to grapple with points, fees, pre-payment options, and other
details. Mancino finds that borrowers are increasingly sophisticated.
Many do substantial Internet research and then turn to a local
seasoned professional to guide them through the myriad options.
There are more mortgage options than ever before, and this year, which
appears to be bringing at least a brief respite in the bidding wars
that have been common for most of this decade, borrowers have a little
more breathing room to research the option that will work best for
While the 30-year interest only fixed loan has taken off, other once
hot mortgage products are dead in the water. There was a lot of buzz
about the 40-year mortgage a year or two ago, but it has gone nowhere,
says Mancino. It has become a vehicle that borrowers with very poor
credit ratings sometimes use to get into a house, but is "very
expensive," he says, and has gained little popularity. Another product
that has largely died out is the 120 or 125 percent mortgage. Touted
as a way for homeowners to buy a house, and also have money to improve
or furnish it, the out-sized loans have proved "not to be good for
either lenders or borrowers," says Mancino.
There is no shortage of mortgage brokers ready to help them make a
decision. "Everybody has a mortgage company now," says Mancino. "There
is tremendous competition."
Corrections or additions?
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