New Mortgages Overview
The boom in real estate prices in America is being fueled in part by interest-only mortgages that are flooding the market with easy money for home buyers. Are these mortgages fabulous new financing tools that are helping more Americans buy homes, or are they a dangerous symptom of a housing bubble that is about to pop? NOW travels to California, where housing prices are continuing to explode, to investigate the risks and benefits of new financing vehicles that are enticing buyers into bigger houses than they ever thought they could afford. Learn more about these new lending models below.
The mortgage industry has been loosening their standards in a variety of ways reducing minimum credit scores; allowing borrowers to finance more of a home's value; permitting borrowers to carry a higher debt load. They have also introduced new loan products:
- Interest-only mortgages: These allow borrowers to pay interest and no principal in the
loan's early years, which keeps payments low for a time.
- Option adjustable-mortgages: These loans carry introductory rates of as low as 1% and give
borrowers multiple payment choices. But borrowers who elect the minimum
payment can see their loan balance rise.
- Piggyback loans: These combine a mortgage with a home-equity loan or line of
credit, allowing borrowers to finance more than 80% of the home's value
without paying for private mortgage insurance.
- No-documentation and low-documentation loans: Under these programs, borrowers can take out a loan while
providing little if any documentation of their income or assets. (Source: THE WALL STREET JOURNAL)
According to industry analysts the face of home ownership has changed during the last few years of the unprecedented housing boom. Buyers who pay no principal at all accounted for 17% of all American mortgages in the second half of 2004. And, "interest-only" mortgages now make up nearly half the market of new mortgages in California. The Mortgage Bankers Association also reports that more Americans are opting for Adjustable Rate Mortgages rather than the more traditional Fixed Rate products to nearly a third up from just 12% in 2001. Additionally, 20% of Americans took mortgages for more than 90% of the purchase price of their homes in 2003. All of these scenarios leave borrowers more vulnerable to interest rate fluctuations and counting somewhat on house prices rising at high rates for the next few years. The Mortgage Bankers Association notes that while home ownerships it at an an all-time high (and American indebtedness), the foreclosure rate is down to 1.08%. The debate over whether the U.S. housing market is boom or bubble remains unresolved for now.
Use the sites below to learn more about housing and mortgage lending in the United States. Also, read a Q and A with Allen Fishbein from the Consumer Federation of America about the new mortgage products. Also, get UCLA economist Christopher Thornburg's take on the California bubble.