Homebuyers Not Afraid of Risky Loans

Results of a new study show that many homebuyers are spending more than suggested and are using specialty mortgages.

October 1, 2005

The widespread availability of specialty mortgages, particularly interest-only loans, is stretching many homebuyers beyond their financial comfort zone.

Nearly one in five—19 percent—of U.S. adults who purchased a primary residence within the last three years say they spent above their suggested price range, according to a new survey by The Wall Street Journal Online/Harris Interactive Personal Finance.

The study also found that a little more than one-third of recent homebuyers who obtained their mortgage through a broker, direct lender, or someone else chose one of the following four creative mortgage options, listed in the order of popularity:

  • Interest-only mortgage. Borrowers pay interest but no principal in the early years of the loan.
  • Piggyback mortgage. The loan combines a standard first mortgage with a home-equity loan or line of credit to avoid private mortgage insurance or the higher interest rates on jumbo loans.
  • Payment option mortgage. Borrowers have four payment options each month and those who elect to make the minimum payment could actually see their loan balance rise rather than fall.
  • Miss-a-payment mortgage. Borrowers are allowed to skip up to two mortgage payments a year and up to 10 payments over the life of the loan without ruining their credit rating.

Regional differences in lending preferences are obvious in the study’s findings. Homebuyers on the West Coast and South were far more likely to exceed their price range than buyers in the Midwest and Northeast.

Twenty-nine percent of homebuyers in the West went above their range, 22 percent in the South, 12 percent in the Midwest, and 8 percent in the Northeast.

"Nontraditional methods of funding a primary residence are becoming more commonplace and acceptable, especially in areas of the country that have seen housing prices skyrocket," says Anne Aldrich, senior vice president of the Financial Services Research Practice at Harris Interactive. "It is important that consumers be aware of all of the options available to them, as well as the possible risks that they may take on with creative mortgage options."

The poll of 2,300 adults in August also took a look at how homebuyers go about obtaining a mortgage. Thirty-nine percent said they worked with a mortgage broker, while 32 percent went through a direct lender, and 8 percent said they used a different source. The rest didn’t need a mortgage to purchase their home.

Results seem to show that as long as lenders don't require higher barriers to entry, borrowers are likely to continue to buy their homes using other people's money, in anticipation of capital gains when they sell.

(c) Copyright 2005 Realty Times. Reprinted with permission.

Editor’s Note: The NATIONAL ASSOCIATION OF REALTORS®, in conjunction with the Center for Responsible Lending, has produced a brochure to inform homebuyers about the risks and advantages of specialty mortgage products. “ Shopping for a Mortgage? Do Your Homework First” can be downloaded for free in PDF format or purchased in bulk online.

Blanche Evans is a writer/editor and CEO of evansEmedia. Formerly, she was a senior editor with Realty Times, where she was named by REALTOR® Magazine as one of the most influential people in the real estate industry.

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