Home owners survive the mortgage muddle … and live to paint the first wall
CARSON CITY – Despite a slumping market, some aspiring home owners are still casting themselves into the mortgage muddle with empty pockets and coming out with equity.
Those who succeed have one important trait: good credit.
People like Wanda Chambers. This week, Chambers, who is not quite 50, bought a two-bedroom house in South Carson City for about $205,000, well below the average selling price in the capital city after five years of a housing boom fueled by lower mortgage interest rates.
The signs of a slowing housing market are evident in Carson City. With interest rates inching up, sales have slowed. Sales are closing only after price reductions from a brisk mid-2005 season, when the average house sold for $339,000. The “House Prices in America” report identified Carson City’s median home prices as grossly overvalued when compared to household incomes. Despite this downturning housing market, people are getting into homes. Sometimes they’re using creative financing methods that could hurt them later.
But not the English-as-a-second-language teacher who secured what is called a “100 percent mortgage.”
“That means no money down,” Chambers said.
Really, Chambers worked a lifetime to afford her first home. She worked on keeping a clean credit record, rather than a substantial stash on her teacher’s salary. How did she do it?
“I had heard about 100 percent mortgages and I asked what we can do,” Chambers said. “(The broker) worked all the numbers.”
The woman who worked the numbers was 20-year Carson City broker Cathie Jackson. Using creative financing methods, people can get into today’s market, she said.
Jackson brokered two loans for Chambers. The first is a 30-year, fixed-rate loan with a 7 percent interest rate, and the second is a 15-year term amortized over 30 years.
The bank agreed that she would be able to repay the loan on fixed-rate interest because of her credit history and overall financial situation. Chambers went over all of her paperwork with her father and broker before deciding what was best for her.
An interest-only loan would’ve been cheaper for Chambers, but she wanted to be conservative, her broker said. So, with enough money on hand to cover closing costs, which was $5,000, a moderately paid school teacher could afford a home of her own.
“I think there have never been more ways to get a loan,” Jackson said. “The market has more possibilities now than I’ve ever seen. But the consumer needs to be educated and know exactly what they are getting.”
Mortgages are complicated, so read your paperwork and ask questions, she said.
“If you’re sitting there and making the biggest purchase of your life and that person can’t or won’t answer your questions, you’re in the wrong place,” she said. “Shop mortgages.”
A good credit record can be more important than cash up front, Jackson said.
Freddie Mac, the mortgage company (NYSE:FRE), reported Thursday that rates on 30-year, fixed-rate mortgages decreased slightly to a nationwide average of 6.74 percent. That’s down from last week’s average of 6.79 percent. Last year at this time, the average was 5.66 percent. They base their rates on 80 percent loan to value because rates are based on a 20 percent downpayment.
Families who got into the housing market with adjustable-rate mortgages when interest rates were 4 percent to 5 percent may find themselves hurting when those rates adjust to the current market.
Terms to know when evaluating mortgages:
— Annual percentage rate: The effective annual cost of a mortgage, including interest, some loan fees and certain other costs.
— Fixed-rate loan: The borrower pays the same amount every month for the term of the loan, regardless of whether interest rates rise or fall. The interest rate used at the beginning of the loan determines the borrower’s monthly payments for the next 15, 30 or 40 years.
— ARM: An adjustable-rate mortgage features an interest rate and payment that change periodically over the life of the loan, based on changes in a specific index.
— Optional ARM: Some payments are recalculated monthly, except during the introductory period. As interest rates change, so do monthly payments. The borrower has four different options on how to pay back a little of what was borrowed plus interest. The options: Minimum payment; interest-only payment; full principal and interest payment; full principal and interest payment based on a 15-year term.
— Index: The economic indicator used to calculate interest rate adjustments for adjustable rate mortgages. Common indices are the 12-Month Treasury Average and the Cost of Funds Index. As the indices move, ARM rates follow.
— Margin: The difference between the interest rate charged on the loan and the loan. Generally, the margin remains fixed over the life of the loan.
— Deferred interest: When you choose the minimum payment in an Optional ARM, your payment may not cover all of the interest due for the month. Instead, the unpaid interest is added to the outstanding balance. Whenever a borrower defers part of a traditional monthly payment, the result is “negative amortization.”
— Negative amortization: A loan repayment schedule in which the loan’s outstanding principal balance increases because the scheduled monthly payments are less than the amount required to pay off the loan.
– Source: Washington Mutual Option ARM information
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