Lowell Deeds

The latest on real estate recordings and new technology from the Middlesex North Registry of Deeds in Lowell

February 14, 2006

“Creative” Mortgages

by @ 7:41 am. Filed under Archived

Yesterday’s Lowell Sun had an interesting article on the popularity and consequences of “creative” mortgages known as “interest only” or “option-adjustable rate” mortgages. Local realtors and mortgage company spokespersons said in the article that more than half the first time home buyers they service chose such an option. While this type of financing permits more people to own homes, it is not without risks. Interest only, as the name declares, requires payment of only the interest for a fixed amount of time, usually the first five years. Option-adjustable rate loans do not even require the payment of the full amount of interest. Instead, the borrower has the option to pay less than the full amount of interest and let the balance of the interest (not to mention the principal) accumulate to be paid at a later time, presumably with additional interest that was incurred on the deferred interest. While this does open up the housing market it does present risks, especially in a time when home price increases have slowed or have even turned into a market with sliding prices. If you borrow 100% of the purchase price and don’t pay down the principal for a few years, if the value of the house decreases, you soon find yourself in the precarious position of owing more money on your home than it is worth. The only way you can sell would be to pay off the balance of the mortgage at closing. Presumably, if you had that kind of cash available, you would have used it to make a down payment on the house in the first place. The Sun’s story is accompanied by an enlightening chart comparing the monthly payments for the two types of mortgages mentioned above with a traditional 30 year fixed rate mortgage. On a $300,000 loan with a fixed rate, your monthly payment for the life of the loan would be $1798. With an interest only loan in the same amount, your monthly payment in years 1 through 5 would by $1375 but in years 6 to 30 it would rise to $2227. With an Option-adjustable loan, your monthly payment for the first five years would only be $1035, but in year 6 it would rise to $2612 for the rest of the loan. Most people with those types of loans undoubtedly plan to refinance in year five but that is completely dependent on the value of the house being equal to or higher than the current value – not a safe bet if you follow long term trends in real estate.

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