On the Money

"Now is the best time to buy a home." You hear it everywhere-from friends, relatives, mortgage lenders, builders and real estate agents.

In fact, you've heard it so often that you probably wonder if it's really true. The short answer: Yes.

Buyers are getting great deals on homes as the frenzied pace of construction eases and inventories rise. And they're getting great deals on mortgages even as interest rates begin to tick back up.

The key is the wide variety of home-loan products now on the market.

"There has never been a better time in history in the mortgage banking world than now," says Doug Long, CEO of Orlando-based Pinnacle Financial Corp. "There are products with 100 percent financing that carry no closing costs. As long as your credit score is high enough, there are even products with no income verification."

Adds Long, "If you can't get a home in today's market, you don't really want one-or your credit is so bad you need to fix it."

To be sure, the tide of the Orlando housing market has turned.

Two years ago, local builders were selling new homes at a breakneck pace. In 2004 there were 22,420 new single-family homes built in Orlando-up almost 44 percent from the 15,612 tally in 2003.

Last year, that began to change. "The market has slowed back to a more normal pace," Long says.

Many builders had sold homes faster than they could build them, creating backlogs in the thousands.

Add in building-material shortages and skyrocketing prices-which pushed building schedules back further and home prices higher-and builders had no choice but to apply the brakes to their sales operations.

Now, as builders are working through their backlogs, the inventory of new single-family homes-a combination of homes that are under construction, homes that are finished but vacant and homes used as models-is up by more than 18 percent over last year.

Also impacting inventory: Many investors are cashing out, thereby flooding the market with brand new resale homes and heightening competition in popular communities.

According to research by the Orlando office of Houston-based MetroStudy, the number of new, vacant single-family homes on the market grew by nearly 98 percent last year, from 1,709 to 3,372.

Meanwhile, the Federal Reserve has been raising the nation's benchmark overnight interest rate. In fact, since June 2004 the rate has been raised 15 times, pushing up what had been historically low long-term interest rates on mortgage loans to between 6 percent and 7 percent.

Nevertheless, industry experts say now remains one of the best times in history to buy a new home. In fact, lenders are so sure home sales will be robust this year that they still expect to do $2.2 trillion in business. That's just 2.4 percent lower than last year's record $2.9 trillion.

The reasons for their optimism are twofold.

First, despite recent hikes, rates still are lower than they have been since the 1960s, and while the supply of homes is inching up, demand remains high-especially in Central Florida, which sees 150 new residents every day.

"We've seen mortgage rates on just about every type of mortgage product tick up a little bit over the past year," says Susie Carlton, a vice president with HomeBanc Mortgage Corp. "But even with the recent uptick, rates are very low by historical standards, so the current rate environment isn't really impacting the home purchase market."

Second, the traditional 30-year, fixed-rate home loan is far from the only option available to buyers. Indeed, there's a creative home-loan product available for every type of buyer.

"There are products that allow for lower credit scores and down payments, and those are good things for first-time buyers who understand budgeting," says Cary Berman, regional mortgage manager of RBC Centura.

Among the most popular products are interest-only and adjustable-rate mortgages, commonly known as ARMs.

While interest-only loans allow buyers to pay the mortgage interest for a limited period of time, adjustable-rate loans give buyers the flexibility of low introductory rates for the first three, five, seven or 10 years of a loan.

When the time has elapsed, the rate-and the mortgage payment-are then adjusted to a pre-indexed level.

According to Carlton, both interest-only loans and ARMs allow buyers to get more home for their money or to purchase a home that may be out of reach with a 30-year fixed-rate loan.

Either loan option allows buyers to save between 20 percent and 40 percent on their monthly payments. Further, says Carlton, such loans are geared toward the buying habits of today's homebuyers.

"Most people today move or refinance within a few years of purchasing a home," Carlton says. "So why pay the premium cost of a loan with a fixed rate for 30 years when you think you'll only be in the house five or six years?"

But there's a downside. The Mortgage Bankers Association says mortgage loan delinquencies in Florida have risen to 4.66 percent, the highest level in five quarters.

The delinquencies are likely to increase, the group says, because of ARMs that started out at very low rates but will crest to market rates of 6 percent or higher. The good news: Only a small percentage of Orlando-area mortgages fall into this category.

Forty-year mortgages also are popular because they're good loans for conservative buyers on fixed incomes, such as teachers and firefighters, says Berman.

"These loans are good for affordability and stability," Berman says. "They increase your buying power by $25,000, which can be the difference between getting into a home or not."

Still, some of today's creative financing packages come with caveats for both borrowers and lenders.

For instance, the "option-ARM loan" starts with a very low introductory interest rate and provides buyers with several options for repaying the loan: paying principal and interest, paying interest only or paying a minimum amount that may not cover even the interest payment.

These loans have come under the scrutiny of lenders and federal regulators because of increasing concern over possible default rates as interest rates rise to levels that loan holders may not be able to cover.

In fact, the nation's third-largest lender, Washington Mutual, has begun looking more closely at pay-option loans and who will qualify for them. RBC Centura does not even offer pay-option loans "because of the volatility of the product," says Berman.

In the end, mortgage experts agree that the market will remain strong despite any slowdown in sales or increases in interest rates, allowing still more people to take advantage of the plethora of home-financing options available to them today.

But the bottom line in home financing remains the same: Keep your credit clean and pay your bills on time.

"The biggest risk associated with a loan is what borrowers do in their own lives to impact their ability to pay the loan after closing," says Carlton. "If a person is not diligent about paying bills and managing their finances, they are just as likely to get into trouble with fixed-rate loans as they are with interest-only loans."

But for the diligent, there's no time like the present to buy a home.

LOAN TERMINOLOGY

Buying a house can be a confusing endeavor. Here are the top terms homebuyers should know before making a purchase:

• Adjustable-Rate Mortgage: A home loan in which the lender periodically adjusts the interest rate according to changes in a pre-selected index rate. The number in the loan describes the frequency of the rate adjustment. For example, the rate on a one-year adjustable-rate loan is adjusted once a year.

• Amortization: The repayment of a mortgage loan by installments with regular payments to cover the principal and interest.

• Annual Percentage Rate (APR): A rate reflecting a loan's total finance charges, including interest, points, private mortgage insurance and other fees.

• Closing Costs: Expenses over and above the price of the property paid by the buyers and sellers to transfer ownership of the property.

• Equity: The difference between the market value of a property and the owner's outstanding home-loan balance.

• Points: Part of the closing costs paid to the lender at closing. Each point equals 1 percent of the home-loan amount.

• Loan-To-Value Ratio (LTV): The maximum amount lenders will approve against the value of any property taken as security for your home loan. For example, if a person wants to buy a property worth $100,000, the lender may approve a loan for 80 percent of the property value. It will then be up to the homebuyer to provide the remaining 20 percent, plus costs

• Truth-In-Lending (TIL): A federal law that requires lenders to fully disclose, in writing, the terms, conditions and costs of a loan, including the annual percentage rate and other charges.

• Balloon Loan: A loan with a fixed rate of interest over a period of time. At the end of that period, the borrower must refinance or pay off the remaining balance in one lump sum payment.

• Principal and Interest (P&I): The principal is the amount borrowed or remaining unpaid, and also the part of the monthly payment that reduces the outstanding balance. The interest is the fee charged for borrowing money.

• Escrow Payment: The placement of funds into a special account to cover regular payment of taxes and insurance.

HOW MUCH CAN YOU AFFORD?

According to home-finance experts, the best way to figure out how much home you can afford is to follow one simple rule: Don't spend more than 50 percent of your gross income on items requiring credit. That means when you add up every monthly payment that is dependent upon credit (credit cards, student loans, car payments) and add in your possible monthly mortgage payment, the total should not be more than half of your gross monthly income.

For example, if you make a total of $5,000 each month, and the total for your credit-based payments is $1,000, then you would be able to qualify for a mortgage payment of no more than $1,500. On a 30-year mortgage with a fixed interest rate of 6 percent, you would be able to afford a $250,000 mortgage. The monthly payment: $1,498.88, not including taxes and insurance.