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

housing bubble.

Mancino (fmancino@gateway-funding.com) 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

them.

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."


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