Despite Early Enticements, Non-Traditional Florida Home Loans May Prove Costly

Many recent home buyers in the area were only able to do so by using so-called nontraditional or exotic loan programs, and are now starting to see problems as a result, writes Robyn Friedman in the Fort Lauderdale Sun-Sentinel.

“A lot of the new and unusual programs are good, but we’re starting to hear about people having problems,” said Steven Schneider, president of the Tallahassee-based Florida Association of Mortgage Brokers (FAMB).

The incredible surge in South Florida housing costs have made home ownership challenging, especially for first-time buyers, according to FAMB. While these unconventional mortgage programs offer the promise of home ownership, there are plenty of strings attached. In some cases, the payments are just too high. While a buyer may qualify for the loan on paper, they might spend close to half of their monthly income on housing, well over the suggested rule of thumb of 30-35 percent. FAMB lists the most popular nontraditional programs as:

• Interest-only mortgages. Well-documented in recent months, the first few years of these loans require interest but no principal to be paid in the early stages. But after the initial interest-only period expires, borrowers can get hit hard. Not only do they start paying down the principal balance on their loan, but the rate itself could be higher.

• Piggyback loans. These loans combine a traditional first mortgage with a Florida home equity loan or line of credit. The use of a piggyback loan often enables borrowers to avoid paying additional insurance. When the mortgage exceeds 80 percent of the value of the house, financial institutions will generally require private mortgage insurance.

• Payment options. Sometimes called “smart loans” or “option ARMs,” they allow borrowers to choose from four payment options each month. 1. Paying interest only. 2. making a fully-amortizing payment based on a 15-year term. 3. Making a full-amortization payment on a 30-year term. 4. Deferring the interest by making a minimum monthly payment. The last option is the most dangerous, for when the interest is deferred, it is added onto the principal and results in the borrower owing more to the bank than originally borrowed.

• Miss-a-Payment loans. With these mortgages, borrowers can flat-out skip up to two payments per year and up to 10 payments over the life of the loan.

• 2/28 or 3/27 Adjustable Rate Mortgages. This newer type of adjustable-rate Florida home loan lets borrowers start with a low fixed rate for two or three years, with the rate subsequently adjusting annually for the next 27 or 28 years.

“[Buyers] could face sticker shock because all of a sudden their interest rate adjusts and they have a bigger payment than they expected,” Schneider said, adding that many borrowers put themselves at greater risk of foreclosure and bankruptcy, particularly if they are on the borderline of qualifying for a mortgage to begin with.

Experts are also expressing concern about borrowers who use piggyback loans to finance 100 percent of the purchase price of their home.

“If they have to sell early on, they’ll have to pay a 6 percent real estate commission as well as selling expenses of about 1.5 percent, so if they’ve financed 100 percent, they’re already in a 7.5 percent negative situation,” said Lee Eisenberg, president of Leading Edge Mortgage Corp. in Boca Raton.

In a market where prices are escalating rapidly, a borrower would gain enough equity quickly to cover these expenses. But price appreciation is expected to slow down, which will make it harder for the value to rise fast enough to cover the mortgage plus selling expenses. Bottom line? Fixed-rate Florida home loans are nearly always the better bet, if you have the choice. Borrowers are given protection against rising interest rates and market corrections. Besides, fixed-rate Florida home mortgage loans are still below 6.25 percent, a historically low mark.

Don’t take a chance you don’t need to just to save a couple dollars. The consequences aren’t worth it.