Be Sure to Plan Ahead, Use Caution When Choosing the Right Florida Home Loan

You see it and read it all the time. Below-market interest rates and rock-bottom monthly payments. A $200,000 home loan for just $565 a month! No credit check! Too good to be true?

“When I tell you there’s 200 different loan options, I mean that. Twenty, 30 years ago, everybody said you have to have a 30-year fixed mortgage. In today’s society, I don’t believe that’s true.” said Re/Max agent Steve Wolvers of Des Moines, Iowa.

Wolvers specialize in “creative financing” for his clients, can rattle off more types of interest-only, 3-2-1 buydown, option mortgages and so forth you ever knew existed. Non-traditional loans like he promotes continue to gain popularity in Florida and across the county. Among the reasons for this are higher Florida mortgage rates, a slower housing market, and increased mobility that makes short-term financing particularly attractive.

But while a fantastic deal might get you inside a house, it can make it just as hard to stay in it. In Iowa, where Wolvers works, residents once finished last the nation in foreclosures, but are now losing homes at a rate that exceeds the national average. Various reasons are to blame, but experts believe the growth of nontraditional loans is a big factor.

“These loans are good for the mortgage company and the real estate agent, but not much good for anyone else,” Holmes Foster, a former Iowa Division of Banking superintendent, said.

SOME OF THE OPTIONS
Imagine interest rates at 1.9 percent (about 4 points below current market rates) and payments as low as $565 for a home selling for $200,000. There must be a catch, right? Right. Agents acknowledge that exotic loans are risky and require financial discipline from borrower. For example:

With the 1.9 percent home loan you can find, that rate changes after as little as a year and continues to fluctuate, said Jack Guttentag, Professor of Finance at the University of Pennsylvania. At some point, the borrower will be required to pay any accumulated interest and principal. Furthermore, the discounted interest rates could result in negative amortization, and the buyer owing more than the house is worth.

A 100 percent financing, interest-only loan means low monthly payments, but no chance to build equity unless the buyer pays extra. Plus, even if you stick it out, you’ll be walloped eventually with much higher payments. Mike Fratantoni, a senior economist at the Mortgage Bankers Association, said a loan resetting to a higher payment can trigger financial distress.

“The question here is if you’re saving $200 a month by having an interest-only loan, what are you doing with that $200?” said Fratantoni. “If you’re not careful with what you’re doing with the extra cash… and not planning for that future increase in payment, then you’re in trouble.”

Statistics say interest-only loans made up 23 percent of the total dollar loan volume nationwide in the first half of 2005, according to the Association.

FINDING THE RIGHT OPTION
Wolvers believes that while an interest-only loan isn’t for everyone, a 30-year fixed mortgage isn’t either. Like a mantra, Wolvers repeats that Americans are unlikely to live in a home more than 5-7 years. If they do, they’re likely to refinance. So consumers are spending money for the security of a long-term fixed rate they are unlikely to need.

A first-time buyer should consider how long the family is likely to live in their home, and consider their financial situation now and in the near-term.

Some unconventional Florida home loan options might actually make sense for young professionals whose incomes will grow rapidly, or for parents who expect to be finished with their children’s education expenses in a few years. It also could make sense if you use the savings on your home loan to eliminate high-interest debt like credit cards or student loans.

This is a very fine line, of course, and one that requires more discipline than many Americans demonstrate.

“My biggest frustration is that not everybody does what I show them they’re supposed to do,” Wolvers said. “They’ll get out of debt by about month six, figure out they’ve got extra income and they go buy a boat. Unfortunately, you can’t control their money. You just try to be sure to educate them.”

THE LOSS OF A JOB
Cindy and Tim Faucz bought a home from Wolvers with an interest-only loan three years ago, and have been saved by the low payments since losing their jobs about a year ago.

“I would be afraid of what would have happened with a conventional loan and higher payments,” Cindy Faucz said.

Faucz said she knows some people don’t have the discipline to pay extra on their mortgage. She escrows her own property taxes and insurance premiums, something she likes because she can place the money in an interest-bearing account.

Consumers also may encounter other financial surprises, such as rising costs of insurance, heating and cooling and upkeep. These concerns are likely to bite you if you max out your home loan to buy as big a home as you can. Also, the key to “low monthly costs” are tax abatements that disappear after four to five years.

The bottom line? Play it safe. Find the best Florida home loan for you, and regardless of what option you select, try to set some money aside. If something happens in the economy that affects wages or employment, you could be stuck with a Florida home loan you can’t pay off. It never hurts to think about the worst-case scenario and how you’d respond.