Caveat Emptor, “let the buyer beware,” has been a phrase associated with the real estate market since the first cave men traded shelters. Today, the August issue of Consumer Reports advises homebuyers to heed that warning when obtaining a new mortgage or home equity loan.In the past, Americans made an offer on a new home and went to their local banker to obtain a fixed-rate mortgage. Today, lenders offer a multitude of loans. However, according to Consumer Reports, uneducated borrowers can quickly find themselves over-extended, wasting thousands of dollars on interest payments and fees. If the housing “bubble” were to burst, causing prices to fall, or the interest rates increased dramatically, buyers with little home equity could find themselves facing foreclosure.Fixed-rate mortgages, ARMS, interest-only mortgages, principal mortgage insurance, balloon payments, and home equity loans are some of the terms consumers should understand before committing to any mortgage. The Center for Responsible Lending a nonprofit organization dedicated to consumer education explains these terms on their Web site.Representatives from Ent Federal Credit Union and Farmers State Bank gave examples of certain types of mortgage that are most appropriate.Jim Moore, the senior vice president of corporate development for Ent, said he takes “a conservative approach” when financing his home so he has a traditional fixed-rate mortgage. Fixed-rate mortgages are exactly that. The interest rate is set when you take out the loan, and monthly payments remain the same throughout the life of the mortgage. Borrowers decide the length of the mortgage, normally 15 or 30 years, based on the monthly payment they can afford. Moore said shorter-term loans save interest over the life of the mortgage, but increase the monthly payment.Renae Bastian, a mortgage loan officer at Farmers State Bank, said when interest rates are low she likes to see customers use fixed-rate mortgages. “Then it’s easier for people to budget their income because their monthly payments are constant,” she said. However, she said the popularity of fixed-rate mortgages has decreased because housing prices have skyrocketed, and many first-time buyers cannot afford the 20 percent down payment needed to procure their loans. A 20 percent down payment on a $200,000 mortgage is $40,000.Fixed-rate mortgages with only 5 percent down are available, but a Principal Mortgage Insurance (PMI) is added (and it’s mandatory) to the monthly payment. PMI protects lenders should a buyer default on a loan. “Increasing monthly payments limits the price home buyers can pay for a house, so adjustable rate mortgages – ARMS – have become popular with many buyers,” Bastian said.Jon Paukovich, the director of real estate lending for Ent, said numerous types of ARMs exist. Initial interest rates are lower than fixed-rate mortgages for three, five or seven years, depending on the term of the loan. When those years are completed, the interest rate is adjusted annually. Ent’s Web site shows borrowers applying for an ARM mortgage can obtain initial interest rates up to 2 1/2 percent lower than fixed-rate mortgages. Ent posts a warning on the site that states if consumers find an ARM offered at an extremely low rate, it is probably a “teaser” to get one’s business and the monthly payments may increase quickly.Paukovich said buyers should always ask for the “cap rate” on ARMs, which is “the highest interest rate charged over the lifetime of the mortgage.””ARM’s are good mortgages for people who will sell their house within a few years, or for buyers who expect their income to increase,” he said.Asked what type of mortgage a military family moving to Falcon should obtain, Paukovich said VA loans cover the PMI on a 5 percent down fixed-rate mortgage for military families. He said while that option is attractive for young military families, an ARM may be best if they expect to be relocated within a few years.According to a September Wall Street Journal article by Alan Greenspan, bank regulators and the National Association of Realtors said homebuyers must “beware” of specialty loans, especially interest only and option ARMs. Paukovich said interest only ARMs are often used by self-employed people who work on commission, such as real estate brokers. Their mortgage payments are low, covering only the monthly interest due, but buyers can pay down the loan principal as their income allows. He said he believes “interest only ARMs” should be paid off speedily.Consumer Reports reported “after three, five or 10 years of only paying interest monthly payments can jump 25 percent when principal is added to the bill,” and if the home prices fall the mortgage could be more than the house is worth. And some ARMs have balloon payments that require the remaining mortgage principal to be paid off in a lump sum when the loan term ends, often just five to seven years after originating the loan.Option ARM mortgages, also called negative amortization loans, give buyers a minimum monthly payment, often not even covering the interest due on the loan. But the unpaid interest is added to the loan principal. The Center for Responsible Lending describes what happens under the terms of an option ARM loan: “Mortgage principal increases over time, home equity decreases and homeowners become less financially secure.”Paukovich said these mortgages gained popularity in California when housing prices soared. “Ent does not offer this type of mortgage because of the high foreclosure rate associated with them,” he said. The National Association of Realtors states “home buyers may not realize that payments on some types of specialty mortgages, especially option ARMs, can increase by as much as 50 percent or more when the introductory period ends.”When interest rates began dropping in 2001, many Americans refinanced their homes to lower their interest rate. But, according to Consumer Reports, between 2001 and 2003 more than half of those refinancing also tapped the value of their homes, taking out home equity loans for home improvements, the purchase of stocks and credit card debt payoffs. Today, many are using their home equity as a down payment for investment or vacation property.The Center for Responsible Lending warns homeowners to use fixed-rate or short term ARMs to refinance their home because many predatory mortgages are associated with the home equity market. Predatory mortgages are “designed to maximize the lender’s revenue by increasing the borrower’s loan balance,” according to the center. The loans contain excessive fees and high interest rates. The equity homeowners have built up over the years is quickly gone and the loans become impossible to pay should a borrower become unemployed for even a few months. The center estimates predatory mortgages in the form of home-equity loans cost Americans $9.1 billion a year.Moore, Paukovich, and Bastian all said the housing market in Colorado Springs is very strong, and they don’t expect a downturn in the market in the near future, especially if the military population increases. However, they urge homebuyers to set budget goals and study their options in order to obtain the best mortgage.For more information on mortgages go towww.responsiblelending.orgwww.consumerreports.orgwww.EntFederal.com
