CREATIVE HOME BUYING MANY FORMS OF FINANCING CAN GET BUYERS IN THE DOOR, BUT PROBLEMS COULD COME UP LATER ON.
Prices for houses and condominiums have risen 20 percent or greater across Southern California for months on end, pushing homes considered affordable just a year ago out of the picture.
But there are still plenty of options for coming up with the green to get past the home-financing blues.
Creative financing gained popularity in the 1980s when the government closed the credit spigot and prices began ascending to what then would be record levels. Terms like swing loans with balloon payments and seller participation became part of the real estate deal-making lexicon.
Some of those transactions consummated, then turned out to be bad deals.
Today's market features terms like 100 percent financing, interest-only mortgages, hybrid loans and two-step loans with balloon payments. Some owners are also cashing out their equity, renting, and plan to buy back into the market, a bet that prices will fall under the point at which they sold.
Some of these will turn out to be bad deals, too, especially if prices head down and interest rates go up.
Buyers across Southern California are twice as creative now than a year ago in response to higher prices and rates that appear heading in that direction, too.
For example, in July 67.7 percent of home loans had an adjustable rate in some form, up from 33.1 percent a year ago, said John Karevoll, an analyst at market tracker DataQuick Information Systems.
The last time adjustable usage was so high was in the late 1980s and early 1990s, when rates were also in the 11 percent range, and mid 1990s as the economy was still shaking off an recessionary hangover.
And while current adjustable usage is high, Karevoll says that the year-ago level was too low.
``We were seeing people buying homes using a fixed-rate mortgage when they should have bought with an adjustable rate,'' he said.
They would be buyers who intend to move or trade up in five or six years.
San Bernardino businessman Duke Djanbatian owns three rental properties and a home in Lake Arrowhead, financing all with some form of an adjustable rate loan.
The owner of Amerihome Mortgage in San Bernardino, Djanbatian practices the same thing he recommends for many clients.
In lots of cases, it makes sense to opt for an adjustable rate home loan and get a lower monthly payment, especially with prices at what are record or near-record levels across Southern California.
Djanbatian thinks it's a good strategy for a simple reason. Why pay more for a 30-year fixed rate loan when you don't have to.
``People don't stay in their home for 30 years. People move around, it seems, about every five years,'' he said.
Richard Pittman, director of fund development at the Consumer Credit Counseling Service of Los Angeles, said buyers who opt for creative financing are making a big bet.
``They want to get more house than they can reasonably afford today so they take the chance that (interest) rates won't to go up dramatically and their income will go up,'' he said of loans that don't lock in a rate for a long period of time.
Other options include seller financing and leasing with an option to buy. Experts advise buyers to carefully weigh their options and do a damage assessment because current conditions always change.
``Consumers should be very savvy about these types of creative loans before they go into them. The biggest question to ask is, (what's) the worst-case scenario because most of them are going to have some kind of an adjustable rate,'' said Holden Lewis, senior reporter at Bankrate.com.
On an interest-only loan the monthly payment is lower because none of the principal is being paid down. Buyers bet that their home's value will continue rising and other market conditions remain in their favor.
``If they are lucky ... maybe they can refinance into something that's not interest-only or they can sell it and not lose money on it. But, man, are they in bad trouble if the market goes down,'' he said.
What's known as hybrid ARMs are also gaining popularity. These are loans that carry a fixed rate for a period of time then adjust, usually every year.
The initial interest rate is typically lower than for a conventional loan but this could change once the adjustment period kicks in.
But a five-year hybrid might be a good bet for a family what needs a lower payment now and is likely to move into a different house before the adjustment period kicks in.
Noah Furie, chief operating officer at Budget Finance in West Los Angeles, said that the universe of home loan products has greatly expanded in the past 15 or 20 years.
``There's good and bad with the increase in options,'' he said.
These products are allowing more people to get into a home today. But choose a bad loan product now and the future could bring some monthly payment shock that might result in the loss of the home, he said.
``It's very important before you take a creative product to either speak to somebody you trust ... or go through loan counseling.''
Gregory J. Wilcox, (818) 713-3743
Source: Mortgage Bankers Association, www.mbaa.org
Knight Ridder Newspapers
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|Publication:||Daily News (Los Angeles, CA)|
|Date:||Oct 3, 2004|
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