Home buyers are getting more conservative - Back to Home Loan Basics
The one-two punch of a tighter mortgage environment and tougher credit standards is forcing buyers back towards more conservative home loans. Home buyers and homeowners who want to refinance are moving away from shorter-term higher risk adjustable rate loans in large numbers.
Shorter-term adjustable-rate mortgages (anything that reverts to an adjustable rate in less than five years), which two years ago accounted for more than one out of every three closings, are dropping dramatically in popularity. So have so called Piggyback mortgages or 80/20 as they have become unattractive, pricey, and very hard to find lenders willing to lend for the second mortgage.
So where does that leave the borrower who needs a more nontraditional loan? Pretty much out of luck.
Borrowers tend to fall into two camps. Conservative/tradtitional, and those who focus almost solely on the monthly payments, asking "what is the smallest payment I can get."
For conservative borrowers, the chance that the payment could increase beyond their comfort level is a very real and unwelcome possibility. They prefer the certainty of a fixed-rate 15- or 30-year mortgage.
For buyers intent on getting the smallest possible monthly payment, adjustable rates are no longer automatically the ideal. As so many people are learning, payments can go up and the ability to refinance in a few years is not a sure thing. For clarity, payments can also go down. I have many customers who took adjustable loans in the late 1990's who saw their payments go down nicely from 2001 - 2005. Also, if you know for sure you are moving in 3-5 years, why take a higher 30-year fixed payment rate?
Homeowners who put down less than five percent the past two or three years are finding they can't qualify for refinancing because they don't have enough equity in their home as the market flattened. Many of these people banked on the idea that home prices always rise dramatically, and that they could easily refinance their loans later with no problem.
By the spring of this year, the percentage of buyers taking out shorter-term adjustable-rate mortgages had dropped from 36 percent to 17 percent.
The market is tightening up, and at the same time, borrowers are finally realizing that teaser-rate mortgages are not a automatic free lunch. Each customer needs to work with a professional loan officer to analyze their exact situation to make an educated loan decision.
With several lender bankruptcies coupled with tighter lending standards in the subprime market, even if people wanted to take riskier subprime loans, they would have difficulty as loans are no longer available. As a result, many low to moderate income households will now be trying to get into FHA government-backed mortgage products, which had traditionally been the choice of low- to moderate-income households. These loans fell out of favor as new non-conforming loans were easier to get, and most small brokers are not able to provide FHA financing. We have seen a HUGE increase in our FHA applications.
Interest-only loans also no longer popular as they recently were. Almost 29 percent of mortgages in the second half of 2006 were interest-only loans, up 3 percent from the first half of the year. Interest-only loans are sometimes tagged "exotic" because they focus on paying only the interest rather than interest plus principal for a period of time -- allowing borrowers to sign on for more house with smaller monthly payments. Proponents see them as a tool that allows buyers who will soon be earning a much larger paycheck to secure that more expensive home. I see them as a bad crutch for most people, as they use them to buy more house than they should, as opposed to a smart financial tool for unique situations.
Interest only loans haven't received the negative attention that has plagued the subprime lending market recently, so they are still available. But, lenders have recently made these loans dramatically less attractive as they have raised the rates on them. Not long ago, you could get an interest only loan for about 1/8th percent higher rate than a standard loan. Today it is about 1/2% higher, taking away the vast majority of the monthly payment savings and effectively killing the interest only loan.
The bottom line:
What was old is now new again. Plain traditional 30-year fixed rate loans with mortgage insurance (if less than 20% down).