Whether it's a dream home, vacation property or retirement condo, consumers face a housing market this year in which climbing interest rates are driving up the costs of buying a home.
Shopping for-and financing-an affordable home has become an increasingly daunting process in many frenzied markets. The median national home price now hovers around $224,000, but prices in hot areas often soar well above.
To address this dilemma, mortgage lenders have introduced a new crop of "affordability" loans, and homebuyers are turning to them as a means to comfortably manage their home financing over the long run. These nontraditional loan products are designed to create a reasonable monthly payment and eliminate dreaded rate increases and "pocketbook shock" from payment resets.
In fact, according to Opteum Financial Services, one of the nation's fastest-growing residential lenders, "affordability" mortgages-such as fixed-rate interest-only products, longer-term (40-year) fixed-rate mortgages and 80-20 loans-are exploding in demand. A few years ago, fixed-rate interest-only mortgages barely existed. According to another financial services firm, UBS AG, these loans now account for around 8 percent of all new residential mortgages taken out in the U.S., and they're growing each month.
Here are some major trends to watch:
Long-Term, Fixed-Rate Interest-Only Loans
Interest-only (IO) loans have received the most headlines in recent years, but as interest rates creep upward, many consumers-including first-time homebuyers-are shying away from short-term IO loans in favor of longer-term fixed-rate IOs to avoid upward payment adjustments.
John Palmiotto, senior vice president for Opteum, says, "Since the average American keeps a mortgage for less than 10 years, fixed-rate IO loans can often help homeowners leverage their buying power in the beginning. After 10 years, when the loan fully amortizes, the assumption is that the borrower's income will also have grown and thus can comfortably absorb the remaining principal portion of the payment."
Momentum of 40-year Loans
While 30-year fixed mortgages have been the "blue-chip" standard, 40-year fixed-rate balloon loans are now gaining major popularity. The appeal is that these loans offer a "happy medium" payment nearly halfway between an interest-only loan and a 30-year fixed. The drawback is its long payback term of 40 years.
The best approach for buyers is to work with their loan officer to educate themselves about the variety of product offerings out there that not only manage their cash flow but that will also be the best choice for their personal financial situation.
"Affordability" mortgages, such as fixed-rate interest-only products, are exploding in demand.
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