Saturday, August 27, 2005

Home Loans: Good, Bad and Ugly

Eduardo Porter of The New York Times has a compelling story in Sunday's paper about high housing prices and the risky loan products used by many first-time buyers, like the interest-only adjustable-rate mortgage. Here's an excerpt from Porter's story:
As the housing boom lifts the median home price way beyond the budget of huge numbers of Americans, middle-income home buyers … are increasingly turning to such mortgages - a decision that could well come back to haunt both them and the banks behind the loans later on.

The newfangled mortgages have been heralded in the industry as useful tools for buyers who would otherwise be shut out of the surging real estate market. That's because they reduce borrowers' monthly payments by allowing them to pay only interest initially while charging a lower interest rate that remains fixed for a few years before starting to adjust annually for the rest of the term, typically 30 years.

But critics say they are riskier than standard mortgages, as they are prone to two payment spikes - one when the interest-only period expires and another when the fixed-rate period ends and the borrower faces potentially much higher interest rates.

Read the entire story in The New York Times at this link.

— The Boy in the Big Housing Bubble