It’s not much of a problem yet, but as the housing market slows, home prices flatten and interest rates rise, mortgage companies are keeping a close watch on homeowners who have certain kinds of loans.
Over the past several years, record-low interest rates have led to many people buying homes. About 15 percent of American homeowners have adjustable-rate mortgages, according to the Washington, D.C.-based Mortgage Bankers Association. Alternative mortgages, such as interest-only mortgages, have been popular with buyers who may not have a strong-enough credit rating to achieve lower monthly payments with a more traditional mortgage, according to the Associated Press.
New Britain-based McCue Mortgage does not offer interest-only mortgages, but McCue Senior Vice President Kim Neilson said she has heard that many in the industry are keeping an eye on loans like pay-option adjustable-rate mortgages.
Pay-option mortgages have flexible payment options, monthly interest-rate adjustments and carry very low minimum payments in the early years of the mortgage, which have made them attractive to many borrowers. But they carry a risk of large payments as the years wear on.
The mortgages also create negative amortization, so the principal balance goes up. Many consumers got that type of mortgage with the expectation that the value of their homes would appreciate significantly, but appreciation is now leveling off.
And to a consumer who is not well-versed in mortgage lingo and facts, those kinds of mortgages could spell trouble, Neilson said. The industry has not yet seen many performance issues, but some homeowners who hold those mortgages could run into trouble over the next few years. Many homebuyers or people refinancing their homes think only about low monthly payments, she said.
“That’s the ARM that everybody’s looking at,” Neilson said. “To an uninformed consumer, it could be detrimental.”
Some consumers are looking ahead and bailing out of their interest-only mortgages now.
‘The Right Questions’
Depending on how a consumer’s interest-only mortgage is set up, getting out of it can be worth it, said Steven Kornfeld, vice president and director of consumer loans at Middletown-based Liberty Bank. When consumers refinance, they have to pay the normal fees associated with getting a new mortgage, and often pre-payment penalties. Many interest-only mortgages were predicated on the predictions that houses would continue to appreciate like they have been, but with the market slowing, that is not happening, Kornfeld said. And some people got into the interest-only mortgages without understanding the conditions.
“They didn’t ask the right questions,” Kornfeld said.
Liberty Bank is seeing a lot of people refinancing into 5/1 adjustable-rate mortgages. The interest rates on those mortgages are fixed for the first five years, then are adjustable. They are the best mortgages for people who know they will be moving within five years. There are also 1/1, 7/1 and 10/1 adjustable-rate mortgages, Kornfeld noted.
Liberty Bank customers are also getting biweekly mortgages. Kornfeld said those allow people to make payments every two weeks and allow them to pay off a 30-year mortgage in about 23 years.
McCue Mortgage is also seeing people refinancing. The interest rates are rising, but it is still a good time to lock in a relatively low rate, according to Neilson. At the beginning of the year, the prime rate was 4.25 percent; it is now 7 percent, she said.
“More and more borrowers are flocking to the 40-year term,” Neilson said.
The 40-year term mortgages can bring down monthly payments, she added.
And despite the rising interest rates, refinancing at Liberty Bank is still taking up a lot of the bank’s business. Forty-one percent of the bank’s mortgage business this year was refinancing, Kornfeld said. People are refinancing for several reasons, including the need to make home improvements or to pay for children’s college tuition.
