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Saturday, September 17, 2005

CNN/Money's List of Riskiest Mortgage Arrangements

Here is CNN/Money's list of the five riskiest mortgages and a table showing the percentages in selected regions. I have one of these:

Just how crazy are crazy mortgages? Check these out:

Interest-only mortgage:

  • How it works: In the first three to 10 years, your payments cover only interest, not principal.
  • The risk: When the interest-only term is up, your payments could increase so much that you can't afford your mortgage.
  • Right for you if...You plan to move before the term ends, or you can count on earning more money soon.

Option- or flexpayment ARM:

  • How it works: You choose what to pay every month: the standard principal and interest, only interest or a minimum that's less than what's needed to cover the interest.
  • The risk: If you make minimum payments, the rest of that month's interest is tacked on to the loan balance , so you could easily end up owing more than your home is worth.
  • Right for you if...You need the flexibility to make smaller monthly payments once in a while -- but only once in a while.

40-year fixed mortgage:

  • How it works: You pay the loan off over 40 years instead of the usual 15 or 30.
  • The risk: You will pay more interest over the term of the loan. Plus, it takes a loooong time to build equity.
  • Right for you if...You can't afford a shorter-term loan but don't want to take on a lot of interest-rate risk.

Piggy-back loan:

  • How it works: By taking out two loans (a traditional mortgage and a home-equity loan or line of credit for the 20 percent down payment) you can avoid private mortgage insurance.
  • The risk: If the price of your house drops, you have no equity cushion, leaving you at risk of owing more than your home is worth.
  • Right for you if...You have money saved for a down payment but fall a little short of 20 percent.

No-doc or low-doc loan mortgage:

  • How it works: This loan lets you borrow without proving you meet the usual income requirements and, in some cases, without documenting your income at all. Most lenders expect you to have a credit score of at least 620.
  • The risk: Borrowing more than you can afford. Plus, depending on your credit score and how much documentation you provide, the rate may be one-half to three points higher than an equivalent full-doc loan.
  • Right for you if...You don't earn enough to qualify for a normal loan (say, if you're starting a business), but you know you won't have trouble making the mortgage payments.

Here's the table showing geographic regions with new-home buyers with interest-only and option payment ARMs in the first six months of 2005:

Danger zones

In these hot markets, about half of today's home buyers are
resorting to creative financing.

Metro area % Buyers with
nontraditional loans
Santa Cruz/Watsonville, Calif. 55
San Francisco 53
Washington, D.C. 52
Boulder/Longmont, Colo. 49
Oakland 49

That makes it easy to understand why warnings such as this from Fed Governor Olson echoing Greenspan's view are being issued by the Fed. Maybe I should listen.

    Posted by on Saturday, September 17, 2005 at 03:50 PM in Economics, Housing | Permalink  TrackBack (0)  Comments (4)

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