REAL ESTATE FINANCE: Adjustables Open Doors but Can be Super Risky
By Jim WassermanSacramento Bee
Sacramento, CA (SHNS) -- Last year Janice Pierini fell in love with a two-bedroom condominium and rushed into an adjustable-rate mortgage. She said it was the only way she could get into a place that cost her more than $200,000.
Now Pierini, of Natomas, Calif., is struggling, like a growing number of homebuyers who face the risks that come with the loan that has become a leading way for many Americans to buy a residence.
Pierini's troubles occurred just months into her interest-only mortgage, when she saw her income drop because of sickness and she fell behind on payments. Though she's worked out a repayment plan, her next hurdle is less than a year away when she must start paying principal, too.
"Down the road a little way I find I am really struggling with this mortgage," said Pierini, a nurse at a Sacramento hospital.
Adjustable mortgages allow many people to buy homes they normally couldn't afford by offering them lower interest rates than a traditional 30-year, fixed mortgage -- in many cases saving the buyers hundreds of dollars each month.
Some homeowners, like Pierini, can face trouble when personal circumstances shift. Others can struggle when their mortgage rates, which are tied to other interest rates, rise at designated intervals. That leaves many people who barely qualified for the homes in the first place paying higher monthly mortgages than they planned on.
Rates for adjustables have climbed as much as 1.5 percentage points in the past year, according to federal mortgage giant Freddie Mac. The increases, combined with other factors, can add $50 to $250 to a monthly payment, experts say.
Pierini's story is just one inside the world of mortgage financing, where most buyers now shun the traditional and simple 30-year fixed rate mortgage.
This spring, nearly 70 percent of homebuyers in some California counties used to a wide variety of adjustable-rate loans that can badly surprise those who don't study their fine print.
Though the use of adjustables is down in some places early 2005, some analysts see warning signs in their continued dominance. The research firm DataQuick Information Systems reported an increase in overdue mortgage payments in some parts of the state during the first quarter of 2006 compared with the same time last year. Those increases may worsen in months ahead as rising interest rates hike monthly payments.
"We expect the risky loans to be a bigger factor later this year," said DataQuick analyst John Karevoll.
Pierini praises adjustable rate financing for getting her into a home she couldn't have bought otherwise. But she advises people who have options to use a fixed rate or wait.
"Take your time, shop around and if at all possible try and get a 30-year fixed," she said. "If it means waiting an extra year or two, do it."
Mortgage bankers acknowledge difficulties that some homeowners are having.
But Michael McGee, president of Winchester McGee Financial, said the industry's array of adjustable mortgage products has opened homeownership to thousands who otherwise could never afford today's prices.
"As time goes on and there's more competition in the mortgage industry, you'll see more and more of these types of products," McGee said. "There will be better opportunities and more opportunities for people to buy a house."
Though there are risks with adjustable rate mortgages, many homeowners successfully use them to their benefit. Experts say adjustable rate loans generally work well in markets where values are rising and best when they're rising quickly.
That's no longer the case in much of California and many other parts of the country. Yet buyers still get swept up in emotion while buying a house and often don't adequately think through their loan decisions, said Pam Canada, executive director of the nonprofit Neighborworks HomeOwnership Center in Sacramento.
The center offers classes on loan basics to people before they buy and helps those struggling with home loans.
"My guess is there's a large percentage of people going in blind," Canada said.
First-time buyers are especially vulnerable, she said, to a hurry-up atmosphere in which loan officers often say "just get this loan now and in a couple of years you can refinance."
But trouble sometimes rises before then.
"It does put you in a situation where you may not always be able to make the payment," Pierini said.
E-mail Jim Wasserman at jwasserman@sacbee.com.
Distributed by Scripps Howard News Service, www.scrippsnews.com.
Editor’s Note: Based on my more than 30 years of covering real estate in the Midwest and California, with excursions all over the nation and into Great Britain, I would advise strongly against interest-only mortgages. You might be better off seeking owner financing or other routes. – David M. Kinchen, member National Assn. of Real Estate Editors since 1971; president 1984.