Real Estate question......

[MsTryska]

I have a question for those who may know....


if the median household income is in the high 40s, yet hosuding costs in many areas are pushing 500K how are there so many people able to afford these houses?


i realize they are prolly in debt to their eyeballs, but how did that happen?


i thought there were income restrictions on housing loans?

[n2doc]

1. Not any more

There are "lenders" out ther who will loan no principle (interest only), 103% value (so no down),variable rate 40 year loans to people so they can "participate" in the "housing miracle". It is worse than the S&L days. With these kinds of loans even someone making 3-4K a month can borrow 400K or more. Especially if they devote 50% of their income to housing in the hope that housing values will continue to skyrocket. Of course, when interest rates go up, look out.

[MsTryska]

10. That's crazy......

why would anyone that's not loaded take on that much risk?


i'm currently renting but i see all this new construction coming up around me, and it's all townhomes and condos starting at 250K, some starting at 400K - for glorified apartments!

I would never tempt fate and buy soemthing like that - not when it's the roof over my head i stand to lose.

[question everything]

30. You may want to consider renting with an option to buy

meaning not new construction but an existing home. Go to open houses, talk to realtors. In contrast to what many say, you, as a buyer, do not need your own agent. An agent wants to close a deal and will work with you if s/he thinks that you are a good prospect.

Anyway, ask an agent about renting with an option to buy. This way your rental payments - a certain percentage - can count toward the purchase.

And you can take your time. Seems that 2005 is so hot that it is going to cool by next year.

[MsTryska]

33. Yeah i plan on taking my time....

i quite like renting at the moment, and love my apartment so i'm not really pressed to move into a house.


Besides which most of my rent-to-buy options around here are ratty townhomes form the 80s. not so much stand alone housing.

[shanti]

39. didn't it used to be 1/3 of your income

for housing? at least it was when i bought in 96. i was only making about 25-27 grand then, and the most the mortgage co. would give me was a 75 grand mortgage. i found something for 67 grand and bought it. of course, my house has increased wildly in value (could sell for about 200 grand now), but i'm glad my note is still reasonable! when the bottom falls out, i'll be ok.

[MsTryska]

41. seems right to me....

that's about all i'm willing to spend for rent and manage comfortably.

[sandnsea]

55. Used to be 25%

Back in the 60's.

Minimum wage was $1.65, my folks house in CA cost $15,000.

Then, in the late 70's, minimum wage was $2.65 and my house in CA cost $25,000.

I don't think there's a $50-70,000 3 br house anywhere in the US, certainly not in California.

[KharmaTrain]

2. Creative Bookkeeping...

First...a lot depends on if you already own or not. If you do, you're riding the property bubble and many real estate people are using this game.

Low interest rates and creative financing plans also come into play. Banks need that real estate business and many are taking chances that the bubble will break in their favor with more people locked into long-term mortgages. Many people don't realize how expensive this game is until it's too late...once everyone gets their piece of the action.

Regulation? Restrictions? Where ya been the last 20 years? The FHA, FMHA, Freddie Mac and Fannie Mae are just tools of the large banks.

What I wonder is how long this game goes on...I'm seeing far more homes for sale in my area than I've seen in 5 years and they're not moving like they once did.

I look at the people buying into the market games now like those who bought into the bubble of the early 80's...many taking up low interest (originally) balloon mortgages and riding the interest roller coaster until the S&L bust all but destroyed the housing market for several years. I sense those days are coming again.

[MsTryska]

11. So how does one tell when the bubble

is going to burst?


interest rates?


more importantly what happens when it does come tumbling down? in my area there is so much new construction and most of it is condos and townhomes....i'm presuming those currently residing in them when the bottom falls out will have to stay, but it just makes me wonder whether all these spanking new communities will turn into crappy ghettoes once all is said and done.

[Warpy]

20. I would be very, very careful right now.

Locally (central New Mexico) we're seeing a 6% rise in the average housing cost in 6 months because of an influx of housing speculators, most of them from California, who are responsible for 1/3 of new home sales in this city.

That's a helluva lot of housing going to speculators. My guess is that when interest rates go up and those variable rate mortgages kick in, that there is going to be a lot of housing suddenly dumped on the market and that is going to depress values here for quite a while.

These new McNeighborhoods that are being bought up by speculators represent either housing held off the market (and attractive to squatters) or housing that will be rented out. In either case, those new suburbs are going to decline into slums pretty quickly.

I think it may be the same in other markets in the southwest, especially in fast growing cities like Las Vegas.

I bought my place 9 years ago when interest rates first went down, and got a below market FHA loan. This neighborhood was just starting to recover from being a rental neighborhood, and it was the right time to buy. I would NOT buy any new construction in this city now, and I'd have to think very carefully before I bought something, at all.

[MsTryska]

21. What you are saying about the speculators and housing that will be rented

out makes a lot of sense with all these townhome and condo communities.


SOme of them are pretty cool mixed use development with shopping on the ground floor, but i can see how they can easily be converted to rental apartments if the need arose.

[question everything]

3. Creative financing

that we will see the results in five to seven years

Many new purchases are done with interest only payments for five years. Thus, instead of paying, say, $1500 a month on a fixed 30 year mortgage, they pay only $800. But in five or seven years they will have to pay the full amount. They count on interest rates going down, house values going up or a combination of both. Also, some do not plan on staying in the house more than a few years, so they plan on selling the house before that and, again, counting on the prices going up, not to end up owing the bank and, of course, the realtors.

The worse plan is interest only as an option, where interest rates can change every month. This results in negative amortization where you end up owing more and more.

Search any news source and you will find many stories about this just in the past few weeks. TIME magazine had this in its cover story last week. The scare is that in five or 7 years all of a sudden all of these buyers will default on their loans and the housing market will be flooded with repos and prices will tank.

Another approach, seen in California by many new immigrants, is that several families buy one house. Thus, you are using several household incomes.

[MsTryska]

12. I still for the life of me

can't figure out why someone would willingly do that to themselves in order to buy a house - unless they intend to flip it.


it's like trading in stock options - if you don't time it jsut right, you are SOL. Which is fine if you've got money to play with liek that, but not when it's your shelter and your credit rating.


I don't understand why this type of financing is so popular.

[Stuckinthebush]

53. The only way it makes sense...

is when you are in the flipping business.

If you buy a property to flip, you assume that you will be making a profit in the short term. Most flippers do their research and are quite secure in their ability to flip for a profit. So, if you know that within 9 months to 1 year you are going to sell the property for a substantial profit, it makes no sense to pay principal on the property for the short term.

I can't think of a reason to do it otherwise.

We were just looking at refinancing before rates skyrocket, and our mortgage broker was pushing an interest only loan. I asked how in the world that makes sense with the knowledge that we plan to stay in this property for the long term. He couldn't answer it. He finally had to admit that it wouldn't make all that much sense unless you had short term cash flow issues, and wanted the lower monthly payments until you could start paying off principal. I can imagine the scenario where a small business owner might want an IO loan because of cash flow issues, but those are few and far between.

I read somewhere that in California a large amount of loans are now IO. That is nuts.

[MsTryska]

57. hmm.....could you refinance with an IO

pay that off for a couple of years, and then refi again to a standard 30 year? or would that not make sense interest-wise?

[Stuckinthebush]

58. You could

I don't know if it would make that much sense unless you were having cash flow problems.

Some things to keep in mind:

1. The IO loan should have a low fixed rate. If it is an adjustable mortgage, then you could get burned.

2. There is no assurance that the rates will be low in two years. You could get burned in a couple of years when you try to refinance because the rate are much higher than now.

3. There is no assurance that your house will retain the current value. If the bubble bursts and prices crash, you could owe more than the house is worth and therefore be unable to refinance without getting hit with PMI insurance.

I would only go with refinancing via a IO mortgage if you were in desperate need of increased cash flow through decreased monthly living costs...and only if you got a fixed IO.

[edhopper]

4. This is one of the many reasons

that point to a Housing Bubble. Logic doesn't work at these times. Remember the "new economy" when tech companies with no earnings and no model to make money were being bought at $100s a share?
This will probably end very badly for this country.

[MsTryska]

13. yeah i guess.....

i think i'm going to sit tight, keep renting, and horde my money, till the bubble bursts, then buy up stuff for cheap, and become a slumlord.



a nice slumlord tho.

[MemphisTiger]

5. Predatory lending

there are already numerous lawsuits against this practice, but the lenders have very powerful lobbist at the state and federal level. This is one of the biggest reasons so many people are filing for bankrupcy, which * is trying to take away. This really gets the poor under the thumb of the rich. I don't think it's an accident. This should be a major issue for the next election.

[MsTryska]

14. Yeah.....i beginnign to find it really hard to believe

all the stuff going on now is an accident. it's jsut too surreal. and highly improbably that no one is thinking of the consequences.

[LSK]

6. Interest only arms

The 1st few years the interest is really low but after say 5 years the interest becomes higher.

[MsTryska]

15. So do you think the people taking advantage of these ARMs

intend on staying int he house after 5 years? or are they all thinking they'll flip it and move on to the house they really like or something?

[LSK]

37. im sure some do

Lots of them are always going on to the next bigger and newer house.

[flamin lib]

40. Most first time buyers live in a house for 3-5 years.

That gives them enough time to build equity and move to a larger house that fits the new family size (had a child, got a raise etc). It's not a case of "flip", but doing something other than renting and flushing money. That's one reason for the popularity of 3&5 year ARMs.

Us Realtors prey on subdivisions that are four years old knowing that a very large number of first time buyers are ready to move up.

[MsTryska]

42. That makes sense......

i guess a starter home is just that - a "starter".


I didn't know that about 4-year old subdivisions tho. that's funny.

[flamin lib]

7. How they do it is through a variety of avenues, many

already listed here. The outcome is the same. Record foreclosure rates. In North Texas foreclosure rates are at a record high and our value increases have been under 5% a year for the last 5 years, some areas even losing value.

The "bubble" is on either coast and it is beginning to have an effect on lenders. They are beginning to realize that they are lending $400,000 on a property that will only be worth $150,000 if the bubble bursts. I've had two houses come in under asking price on appraisal--that's a first! Lenders are beginning to crack down on excessive appraisals.

I remember seeing a scrawl on a restroom wall a few years back: "Please God, just one more real estate boom. I promise not to piss it away this time." Us folks here in Texas have learned our lesson.

[MsTryska]

17. *lmao* @ the bathroom graffiti!

I'm not sure where in Texas you are, but I would say Houston is a similar city to Atlanta as far as it's style of growth goes....

right now the big thing here besides the mcmansions on postage stamp lots are condos and townhomes....

do you have any idea what happens to these big communities that are selling glorified apartments for 400K (in a suburb i might add) when everything goes to hell?

[flamin lib]

35. Not seeing any $400k condos in the Dallas/Ft Worth area

unless they are in the downtown biz district. Seeing a lot of McMansions on .001 acre lots. Twenty feet of front yard, ten feet between houses and enough room in the back to put a hot tub.

Condo's and townhomes seem to be making a comeback for live-in owners as the boomers downsize and first time buyers see the difference between rent and owning.

[MsTryska]

43. Yeah there's some building going on here

in anticipation of Boomer retirement.....that's more the ranch style condos tho.

altho they do have a couple of ritzy highrises coming up specifically geared to the senior community in the city.


ironically enouhg i'll be going to a forum tomorrow on what Atlanta will be doing to make housing for all these seniors - so i should get some interesting info.

[elehhhhna]

46. What's hot in Houston is entry-level stand-alone housing--

New construction for 100-130K

[David Zephyr]

23. There is no bubble on the Coasts even though it seems some wish it so.

Texas has historically had the worst speculative real estate boom-bust records in the nation. Sadly, it's about to happen again there. Real estate prices in Dallas are already down in some areas by 10%. I've seen entire "planned housing communities" surrounded with cyclone fencing in Houston three times in my lifetime because of over-development which far exceeded any possible demand.

On the other hand, California, for example has never had one real estate down cycle like those that plague Texas. The only time that real estate in Southern California was essentially flat was in the early 1990's when military bases were closed by the Bush Administration during the Bush Recession. Also, that was the only time...and this is important...that the inventory of available homes in Southern California reached 23 months. It is currently only 1 1/2 months which is the lowest it has been in many, many decades.

Demand for coastal properties by both Americans and foreigners continues to outstrip any possible supply. The same thing is true for apartment vacancy rates here in Southern California. In fact, there is less rental housing than ever because of apartment conversions to condos. Between 1998 and 2002 (five years), San Diego County had approximately 100 apartment-to-condo-conversions (ACC) per year, in 2003 there the SDC reported nearly 400 ACC's, 2004 saw that number jump to nearly 800 and there were nearly 400 ACC's there in just the first quarter alone. Who's buying the condos? The renters and investors. And, of course, the rental vacancy rates drop even further.

Texas, on the other hand, has soaring housing inventories and vacancy rates. That spells trouble.

Alan Greenspan spoke of "regional bubbles" without going into detail.

Sadly, I have watched many posters here at the DU post how real estate on the coasts is going to implode and there is almost a envious quality to it. That is unfortunate.

The facts and statistics clearly show that there is no bubble at this time in Southern California real estate, even though some here may be not-so-secretly wishing for there to be one.

Another thing that keeps the supply in Southern California so low is that because Southern Californians tend to have greater incomes and more financial assets than others, it is very common here for families to have vacation homes at the beach, mountains and the desert just as Californians historically have had multiple cars per family, three and four car garages. I understand that this builds resentment, but that's just the way it is.

Finally, interest only loans are a very helpful tool for homeowners who are trying to sell a home and buy another one at the same time. By taking an interest only loan, the homeowner can "bridge" the situation temporarily and be able to wait for the highest offer for their home and later take the proceeds and re-finance a conventional fixed 15 or 30 year loan.

[MsTryska]

26. but what about people buying their first

250K home on an interest-only loan, when they have a combined salary of 65K?


that doesn't seem right to me.



btw - what is cyclone fencing and what does it imply? (i'm preparing for the worst in my neighborhood in Atlanta)

[ret5hd]

52. cyclone fence is simply common chain-link fence...

and doesn't imply anything

edit:typo

[progressivebydesign]

29. No bubble here, but people are holding their homes right now.

Up here in Pacific Northwest there is ZERO evidence of a bubble. If you live in desirable places, the homes are going to keep their value. Unless you live in an area that is dependent upon one type of industry, and that industry fails BIG, then there should be no burst. I think that many people have been pushing the bubble meme here and elsewhere because they hope to cause one... so they can afford a home. I have noticed that listings and purchases have calmed down this year, because people are hanging onto their homes when the interest rates started to climb. No bubble.

[flamin lib]

38. Sorry if I rubbed ya wrong. It just seems to me that

20-30% annual value increases can't go on forever. Maybe I'm wrong--happened before when I thought I made a mistake but found that I didn't.

Texas history has been a 5% growth in valuation back to when it was a country. Some short term (5 year) recessions in value, but an otherwise slow and steady growth.

My observations are that national lenders are becoming nervous about valuations as revealed by clamping down on any evidence of inflated appraisals.

Do I want a burst? Ya gotta be freakin kiddin, cause I make a livin in this biz. If either coast goes bust the loan money will dry up so fast I'll invest in moisturizing cream.

[Inland]

8. It's a new era in capital markets, and even home mortgages have changed.

There are more products available for lower incomes, and that's a product of world wide competition in capital markets.

An increased supply of capital (from China, Europe, wherever) is put in a financial system of greater worldwide competition (your bank is Swiss or Dutch) and the system is better able to take on risk by diversfying portfolios to lenders around the world.

[MsTryska]

18. so do you think this is a good thing then? nt

nt

[Inland]

36. I hadn't considered it in terms of good or bad.......but I suppose that

the BAD thing is the fact that Americans borrow too much and save too little, not that there are plenty of bankers working hard to give them money on easy terms or provide lots of different financial products.

The problem is the bubble, that is, some people are making a mistake in buying real estate at these prices and are investing in another even dumber person coming along. Cheap financing can't create the bubble--cheap financing lowers the cost of buying real estate and therefore increases demand, but it doesnt' irrationally increase demand.

That's what I think.

[MsTryska]

44. interesting and well-thought out perspective....

so do you think the demand nw is irrationally increasing?

and if so, do you believe it's basically human greed?

[Inland]

50. Investing is always based on greed.

But a bubble is when a large number make a mistake. Profit is the motivation, buying low and selling high is the goal, paying too much for the investment is some other type of fault besides greed.

Is there a bubble now? I wouldn't buy anything on the hope that past gains would be repeated in the future. I wouldn't buy anything at all in southern Florida or other hot markets. Even my little midwestern suburban condo association has about ten percent owners buying solely for investment. So many people are buying second homes that they can dump if things get tight, and they will, someday... That's when I would buy.

[MsTryska]

51. yeah, that's pretty much what i am waiting for too....

housing at these prices are overvalued imo.

[AngryAmish]

9. Many reasons

1. Two income families.
2. Previous houses have also gone up in value, thus a larger down payments.
3. If they bought early, then they bought at lower prices.
4. I have run out of reasons.

[flamin lib]

16. Think it's bad now, wait 'til the banks get into the game.

Banks and lending institutions have been trying to get into the Real Estate business for years. If they do, the consumer will be in a very precarious situation. One person will handle loan, listing, and purchasing negotiating. How can one person serve three masters? Short answer is can't be done.

more info here: http://www.rismedia.com/index.php/article/articleview/10660/1/1/

[Warpy]

19. Mortgages have actually been getting eaiser to come by

because lenders no longer insist on that 20% down payment. People can finance houses on as little as $1000 down for a modest house. Lenders look at overall family expenses and prior debt load when calculating whether or not a family is likely to default. They now allow for 60% of family income going towards housing in some markets.

Then there are the interest-only mortgages, a truly scary idea that gets a family into a house for a low down payment and low initial payments (only the finance charges) for a period of up to five years. Then principal charges get tacked on and the monthly payment goes up to more than it would have been under a conventional 30 year mortgage.

Then there are the rent to own options, where a family pays slightly more than the average rent and the overpayments accrue towards a down payment on the property and the record of monthly rent becomes a record of the family's ability to pay down a mortgage.

Families are now spending every dime on housing, furnishing their McMansions with resin lawn furniture because everything has gone toward the purchase of the home and often buying groceries and clothing on plastic credit. They call this being house poor.

This is what families on both coasts are having to do to afford living space close to the cities. It's either that or resign themselves to several hours a day commuting time to an exurb with reasonable prices, which becomes false economy in a country with rising fuel and car purchase prices.

It's a mess, second only to the healthcare mess.

[MsTryska]

22. I'm seeign the same in Atlanta.....

people who work int he City proper are now living way the hell out in the boonies in these brand spanking new developemtns, some of them more than 30 miles away from their jobs in snarled interestate traffic. it's really quite crazy, because as you say the Counties themselves aren't equipped to handle it, and the business that comes out to service these exurbanites are Wal-mart and TGI Fridays. it just lessens the culture all around i think.

[Egalitariat]

24. Are you comparing "median" income to "average" house prices?

The answer to your question is: historically low interest rates and lenders willing to loan a huge % of the house's value.

[MsTryska]

25. yeah....actually i guess I am....

or rather - i'm puzzled by median income or even average income for a family of four, compared to the "$250+ for a condo" housing market in my area specifically.

even if i live in a fairly rich suburb - i know there's not THAT many people who can afford the amount of extremely expensive housing being built around here.

[progressivebydesign]

27. A basic real estate primer for these times...

First. People who make 40k (without a spouse also making 40k) don't buy 500k houses. They may OWN those houses, because the 200k house they bought gained value. Regardless of creative financing, you cannot finance a home that far out of your price range and debt to income ratio.

Second. Just because there is a median income of 40k does not mean that everyone makes that. It means those above it can afford more expensive homes. AND.. it means that even if someone makes 40k, they may have a spouse that makes 40k as well, then they'd qualify for a more expensive home. Also, you don't know if those people may have made equity on homes elsewhere and purchased with that money.

Third. 500k homes are not the only homes available in the areas you're obviously refering to. Most of AMerica does not have a home price near that. It depends upon the location. You want to be near either coast, you're going to pay the big bucks. 40k per year would buy a nice house in non-demand areas.

[MsTryska]

31. I'm talking about Atlanta.

and i kid you not - in my suburb (not the city mind you, a suburb)

right on my street...there are 5 different subdivisions being built, with the lowest being Townhomes for 250K....the actual houses are in the 400K range to start.


actually here's the stats for my area:

"Income: $28,909 per capita (Calculated from Cobb County Data from the Bureau of Economic Analysis) - $56,134 per household (by National Decision Systems with assistance from Georgia Power-Economic Development Organization)


New Housing: $375,000 to $1.4 million – as of 8/2004

Median Housing Value: $91,980"


So yes the median housing value is about right for my area - the established housing is all post-WWII brick ranches for the most part.

But with the amount of expensive housing cropping up here, and cropping up all over the metro atlanta area - and per capita/per household income not really enough to support all the quarter-mil to half-mil housing tracts, i'm utterly puzzled.

[NewJeffCT]

28. median means half above & half below...

so, the half above might be making considerably more than $40K...

[MsTryska]

32. yes.

which i am using to extrapolate - using figures from the "100K salary does not equal rich" thread (http://www.democraticunderground.com/discuss/duboard.ph... )



# HOUSEHOLDS UNDER $75,000 72%

# HOUSEHOLDS UNDER $100,000 83%

# HOUSEHOLDS UNDER $150,000 92%

# HOUSEHOLDS UNDER $200,000 95%

# HOUSEHOLDS UNDER $250,000 97%


if 92% of households according to the census site make less than 150K, who is buying up all these half a million dollar homes that these companies are building?


i know for the atlanta area, the amount of brand new high dollar subdivisions in my area is not an anomaly. What's going on in my county is going on in every other of the 13 counties that are considered the Atlanta metro area.

[linazelle]

34. I watch this show on HGTV that compares home prices in different

markets. They usually go to say: CA, Atlanta, NY, etc. and compare what you get for, say, $400k. All I can think about is WHO ARE THESE PEOPLE and what do they do that they are able to afford $400k homes? I'm used to $250k. I can see that. But $400k+? It's definitely out of my reach.

[MsTryska]

45. *lol* that's exactly what i've been asking myself

as these brand-spanking new subdivisions have been popping up all over the place.

who the hell are all these people with 400K to spend on a house and more importantly WHY are they spending that kind of money on these crappy structures??

[elehhhhna]

47. My Q is: Who the heck WANTS a 400K home?

The prop. tax, the furnishings, the "right" cars, etc,...all to keep up with the Joneses, who don't give a shit anyway?

More stuff = more stuff to worry about.

(Having said that,we moved from Chgo suburbs to Houston suburbs several years ago & found our "dream home"--2600 sf, huge pool, double lot, backs up to 50 acres of parkland--for under 140K. We LOVE it, but the next house wil be smaller, if not a boat...)

[DemonFighterLives]

48. No answers, just find this subject interesting

Both my sister and sister in law are being hit hard on their mortgages by property tax increases. Dubby's cutbacks to the states have led to higher property taxes and his 9/11 has led to higher insurance rates.
On topic, I think the banks are lending beyond peoples ability. It seems like a nice idea to scrimp and buy a house, but after a few years it has to get old. I think many will lose their homes in a few years. The big homes are called cardboard castles in the trade and it seems to me to be better to fix up an old house. At least one that has been standing for many years sure beats one that is all moldy after 10 years.
Wife and I were out looking for land in the outstate areas last week and land prices are still rising. It used to be that swampy and or tree covered was considered a detriment. Everything was valued by tillable/or not because of the agriculture based economy. Now it is people buying it for hunting ground that pushed everything to 1000$ an acre. Some just sold for 1750$ an acre.
We are hoping for a bubble on the buying side, but would like our current home to hold its value.

[question everything]

49. WSJ: Lenders Retool Long-Term Mortgages

Lenders Retool Long-Term Mortgages

New Crop of Loans Aims to Keep Payments Down, With Interest-Only Features, 40-Year Terms

By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
June 16, 2005; Page D1

(snip)

The newest crop of products is largely aimed at borrowers who are looking for lower payments but are also concerned about interest-rate risk. In recent months, mortgage experts have been surprised by the continued strong interest in adjustable-rate mortgages at a time when borrowers can still lock in a fixed-rate loan at rates well below 6%. With rising short-term interest rates reducing the relative attractiveness of adjustable loans, lenders are seeing greater interest in loans that protect borrowers from rising interest rates -- and are introducing products for that market.

Last month, Wells Fargo & Co. rolled out a 30-year fixed-rate mortgage that is interest-only for the first 10 or 15 years. The interest rate remains the same throughout the life of the loan, but the monthly payment is recalculated after the interest-only period ends so that the mortgage balance is paid off over the remaining 15 or 20 years. U.S. Bank Home Mortgage, a unit of U.S. Bancorp, plans to introduce a 20-year fixed-rate mortgage with an interest-only feature for the first 10 years. Bank of America Corp., IndyMac Bancorp Inc. and LendingTree.com, a unit of IAC/InterActive Corp., all have fixed-rate interest-only mortgages in the works.

Forty-year mortgages -- which keep monthly payments down but cost more over the long term -- also are attracting more notice in the wake of Fannie Mae's recent decision to expand its purchases of these loans. First offered in the 1980s, 40-year loans account for less than 1% of mortgage originations, according to the Mortgage Bankers Association. More banks may be willing to offer them now that they know they can be sold to Fannie Mae, which has been purchasing 40-year mortgages since September 2003 under a pilot program with 22 credit unions. Fannie will purchase both fixed- and adjustable-rate 40-year mortgages.

(snip)


But like other interest-only loans, they tend to be more costly than standard mortgages. At Countrywide, the interest rate on an interest-only loan is typically one-eighth of a percentage point higher than the rate on a comparable loan without the interest-only feature. Wells Fargo says its borrowers typically pay about one-quarter point more in upfront costs -- or $500 on a $200,000 mortgage. Borrowers can face payment shock when the interest-only period ends. A borrower with a $200,000, 5.50% 30-year mortgage that's interest-only for the first 15 years would see the monthly payment increase to $1,634 from $917 when the loan recasts so that the mortgage can be paid off in the remaining years, according to HSH Associates in Pompton Plains, N.J.

(snip)

Forty-year mortgages can be costly over the long haul. Rates on these loans tend to be about 0.25 to 0.375 percentage point higher than the rate on a comparable 30-year mortgage. Borrowers also pay more interest over time because the loan is stretched over an additional 10 years. With a $200,000 mortgage with a 5.75% fixed rate, a borrower with a 40-year mortgage will pay roughly $312,000 in interest over the life of the loan, according to HSH Associates, versus about $220,000 in interest if the same loan has a 30-year term, assuming both loans carry the same interest rate. If the rate on the 40-year mortgage is 6%, the total interest payments jump to about $328,000.

Some lenders are tweaking the formula. Hingham Institution for Savings in Hingham, Mass., last year introduced a 20-20 mortgage, a 40-year loan with a single rate adjustment after the first 20 years. Because it is essentially two 20-year loans, the rate on the mortgage is one-quarter to one-eighth of a point below the rate on a standard 30-year loan. "It's been our most popular product," says Hingham vice president Michael Sinclair.

Write to Ruth Simon at [e-mail]

URL for this article:
http://online.wsj.com/article/0,,SB111888037595260997,00.html

[elehhhhna]

54. Any experts care to comment on the impact of rising property taxes

on these borrowers?

[slackmaster]

56. It's a major deal for a lot of people

Even here in California where we have the Proposition 13 caps on property taxes, I'd be very hesitant to sell even to move into a smaller, less expensive home.

I'm paying about $1,850 per year. I could sell my house for about $500K. If I bought even a minimal house at say $350K, my property tax would almost double. Trading up for a more expensive home is out of the question. Even another $500K house in a less expensive area (in California) would bring my property tax bill up to $5,000 per year.

I've heard of property tax rates over 5% in some parts of Texas. In Cali it's limited to 1%, with annual increases of 2% of the tax.