Low-payment
mortgages harder to get
In recent years, mortgage lenders have offered more financing
options than ever before. Homeowners today can find a loan that
suits almost any financial situation and tolerance for risk. New
federal guidelines, however, may make some of these mortgage
options less common.
The nation’s financial regulatory agencies have proposed
guidelines aimed at “nontraditional mortgages.?In
particular, the agencies pointed to interest-only mortgages and
the type of adjustable rate mortgages known as an option-ARMs or
flex-ARMs, which they feel pose a higher risk to both homeowners
and the financial community.
With an interest-only mortgage, a homeowner pays just the
interest owing every month for a fixed period -- usually three
to five years. Then, depending on the term of the loan, the
borrower has 20 to 25 years to repay the principal, plus
interest. An option-ARM gives the homeowner a choice of payments
each month, including an interest-only option and a minimum
payment option that does not cover all of the interest owing.
While these mortgage options can make it easier for some
people to afford homes by providing lower monthly payments, they
also carry more risk than traditional fixed-rate and
adjustable-rate loans. Here’s an overview of how the proposed
guidelines would address the major concerns:
- More thorough disclosure: With a
traditional mortgage, payments include both principal and
interest, so the balance of the loan is reduced every month.
When a homeowner pays only the interest, however, the
balance is never reduced. Even more worrisome is negative
amortization -- when monthly payments do not cover all the
interest due, the homeowner ends up owing more than the
original amount of the loan. The federal agencies want to
make sure that lenders properly explain these risks, and
that borrowers fully understand them before taking out a
nontraditional loan.
- Repayment adjustment: After an initial
period, the low monthly payments of nontraditional mortgages
generally rise substantially. Borrowers who were attracted
by the low introductory rates or payments may find
themselves suddenly unable to meet their new financial
obligation. Lenders may be required to adjust their
schedules to reduce this “payment shock.?br>
- More stringent approval process:
Nontraditional mortgages may be offered to borrowers who do
not qualify for traditional financing because of poor credit
or incomplete documentation. New rules may oblige financial
institutions to be more rigorous when approving
applications, and may require borrowers to submit proof of
their income and their ability to carry higher debt loads.
The federal agencies?recommendations may compel financial
institutions to offer fewer nontraditional loans.
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