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REAL ESTATE
Plain talk about fancy mortgages
Ted Wilson
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Stick with the old-fashioned
30-year fixed
by Jeff Hammerberg
Special to Q-Notes
The word “candidate” derives from the
word “candid,” and politicians running for
office this year have learned that voters prefer
frank talk, not a sales pitch. The same is true
for homeowners shopping for a mortgage. As
we prepare for springtime — which is histori
cally the best time to buy a home — it is
appropriate to talk about ways to weed out the
hype about exotic residential mortgages in
favor of old-fashioned fixed rate loans.
The most recent bull market in real estate
was artificially inflated by high-risk loans that
encouraged consumers to leverage themselves
to the max. The old-fashioned and reliable 30-
year fixed rate mortgage — which helped to
steadily grow this nations housing market for
many decades — was upstaged by sexier,
trendier, more exotic residential mortgages.
Too many borrowers got in over their
heads and are now paying a painful price; and
the current mortgage crisis'has left consumers
shell-shocked and wary.
Many bad loans were made to good people
within the past few years, and millions of bor
rowers got stuck with ultra-fancy mortgages
that were inappropriate, expensive and down
right difficult to comprehend. To avoid that
trap while getting the most from your mort
gage dollars, it pays to learn as much as possi
ble about various types of loans and refinanc
ing programs. Choose those that help you
grow equity in realistic, manageable ways.
Highly leveraged loans have their place in
the market, but for most homebuyers, espe
cially those who are not professional investors,
such mortgages can be a
financial nightmare.
Especially in 2008, it is
prudent to opt for a low-
risk, no-frills mortgage
with user-friendly terms
and conditions that will
not change with the weath
er but will help you safely
withstand any economic
climate or storm.
Here is the straight
sauce on three of the most
exotic — but more risky
— home loans.
Hybrids
Suddenly hybrids came into fashion, play
ing upon the emotions of those who associate
anything named “hybrid” with ecological
responsibility and energy independence. And
while these hybrid mortgages blended the best
of several different types of loans into one
convenient and user-controlled package, most
were structured around a typicd adjustable
interest rate mortgage.
In today’s climate an adjustable rate is too
volatile for most homeowners, and the other
hybrid features are just more high-risk bells
and whisdes.
No-money-down mortgages
Then there were those dreaded no-money-
down loans. We all want to get something for
nothing, and no-money-down is a phrase that
usually precedes a get-rich-quick sales pitch.
In the real estate business
“no down payment” is
another way of saying “no
equity” If you buy without
putting anything down and
property values plummet
you learn the meaning of
“upside down.”
Scores of homeowners
are “upside down” in their
loans, or in other words they
now owe more on their
mortgages than their homes
are worth. Pay the biggest
down payment you can
manage, because it is money in the bank.
Negative amortization loans
Another exotic loan that makes perennial
comebacks is the negative amortization loan.
With this kind of mortgage you can make
monthly payments ad infinitum and still wind
up owing more on your mortgage than you did
when you first took out the loan. Negative amor
tization mortgages become wildly popular dur
ing every major real estate bull market and then
go out of favor when homeowners experience
the dark side of these equity-draining loans.
Each generation of Americans learns
about negative amortization by first becoming
enamoured by the concept and then learning
to hate it. But even if you tell your children
and grandchildren about them they probably
will have to live to learn for themselves how
risky these highly leveraged and suspiciously
seductive loans can be.
By now most homeowners understand
that adjustable rates and no-equity loans
are dangerous in a rising interest rate envi
ronment, but a few years ago the ARM was
marketed as the quickest path to wealth.
For many it was, because they could use a
low rate to buy property that was soon sold
for fast profits. But in a slower market with
the potential for unexpected rate hikes,
avoid the ARM.
Stick with the retro reliability of a 30-year
fixed rate mortgage, and enjoy an ideal combi
nation of cheap rates, low risk, predictable
payments and easy-to-understand terms.
When applying for a loan, also specify that
you want mortgages that do not contain pre
payment clauses that penalize you for paying
them off early.
Today’s interest rates are at historically low
levels, with fixed rates hovering around 5.5
percent on 30-year fixed rate loans and at or
below 5 percent on 15-year notes. Housing
prices continue to be once-in-a-lifetime bar
gains, and 2008 will be a banner year for those
who buy affordable homes with exceptionally
attractive mortgage rates. Buy wisely, enjoy
your home, and don t worry about the mort
gage meltdown drama. I
_ Jeff Hammerberg is the founder of
GayRealEstate.com, the largest company in the
nation catering to gay and lesbian home buyers
and sellers. Access the site for more information
on the housing market and in-depth resources.
MARCH 8.2008 • Q-NOTES