A Mortgage Primer

As interest rates inch up and Gulf Coast property values continue to climb, is the American dream of owning a piece of paradise in jeopardy?

Tampa Bay-area mortgage brokers are both swift and reassuring in their response: Thanks to buyer-friendly programs that integrate creative financing strategies, now is actually an ideal time to purchase a home.

"If you look at historical data, the current rates, which are less than 7 percent, are comparatively low," says Richard Appell, regional mortgage manager and senior vice president at BB&T's state headquarters in St. Petersburg. "In terms of location, the Gulf Coast is a relatively good buy compared to Naples, West Palm Beach or Miami."

In recent years, Appell notes, buyers have changed. Therefore, the way most homes are financed has changed as well.

Gone, for example, are the days when a family would buy a home with the intention of spending decades at the same address.

"In today's increasingly mobile society, young families generally stay in their homes for only five to seven years before moving on," says Appell.

So with more Americans on the move, lenders have developed financing programs that are viable-and less costly-alternatives to conventional 15- and 30-year, fixed-rate mortgages. Others incorporate the lower monthly payments of adjustable-rate mortgages (ARMs) to keep initial payments lower while allowing buyers to build equity.

Here are several of the innovative financing options now available in the home-buying marketplace.

INTEREST-ONLY LOANS

New within the past five years, interest-only ARMs allow you to make interest-only payments for a set period of time before making payments on the principal. And lower initial payments, of course, means you can qualify for a more expensive home.

On a seven-year, interest-only ARM, for example, buyers make a fixed-rate interest payment for the first seven years. After the seventh year, the loan may convert to a traditional mortgage with principal and interest payments due each month.

"For buyers who plan to stay in a home only five to seven years, a seven- or 10-year, interest-only ARM is the best way to go," says Appell. "If Florida's property appreciation continues, a buyer will establish equity in the home by the time he sells."

But there's a gamble involved. With an ARM, your payments are lower at first and will stay low-provided interest rates in general don't skyrocket. If they do, the lender typically will adjust your ARM rate upward by a maximum of 2 percentage points a year and a maximum of 6 percent over the entire loan period.

Worst case, an ARM that starts out at, say, 5.75 percent, can increase to 7.75 percent in the second year, to 9.75 percent in the third year and to 11.75 percent in the fourth year. Over that period your monthly payment would rise from $581 to $1,000.

40-YEAR AMORTIZATION PROGRAMS

First introduced during the interest-rate crisis of the early 1980s, the 40-year amortization loan reduces your monthly payment by extending the length a decade beyond the standard 30-year mortgage. Ironically, the program is now making a comeback not because of high interest rates, but because of high prices.

According to Jane Floyd, president of Diversified Mortgage, the 40-year option is available with several different programs, including fixed-rate, ARMs and interest-only mortgages.

Floyd, whose company primarily serves Pinellas, Pasco and Hillsborough counties, believes this program is a good option for homebuyers in areas such as Tampa Bay, where property values are appreciating rapidly. The program can also help first-time buyers and those who have less-than-perfect credit.

A disadvantage, of course, is the fact that it will take longer to build equity in your home-a drawback that's mitigated during periods of soaring values but more noticeable when the market cools and appreciation flattens.

100-PERCENT FINANCING

Even if you don't have money for a down payment, you can still purchase a home using 100-percent financing.

"A lot of people who rent can afford a mortgage payment, but can't afford a down payment," says Brian Lesandro, production branch manager of the Tampa office of Countrywide Mortgage.

The program offers buyers an 80/20 option that divides the purchase price of the home into two loans. The first mortgage funds 80 percent of the home's total cost while a second "piggyback" loan finances the remaining 20 percent. By splitting the purchase price into two loans, the cost of private mortgage insurance (PMI), which is usually required on loans of more than 80 percent, is eliminated.

Other lenders offer 107-percent financing to cover the price of the home and all closing costs, so buyers virtually have no out-of-pocket expenses.

According to Sean Pagani, a licensed commercial and residential mortgage broker with Palm Tree Mortgage & Capital Funding Group based in Estero, buyers who take advantage of this financing plan should have strong credit and a reasonable debt-to-income ratio.

"Generally, a buyer's liability, including all loans and debts, must be less than 45 percent of his household income in order to qualify," says Pagani.

Rates will vary from lender to lender, but they may run a full percent higher than the going rate on an 80-percent mortgage.

100-PERCENT LOT LOANS

Buyers who prefer to build later may wish to consider a 100-percent lot loan.

"Land values in our area are going up tenfold," says Kevin Waugh, regional sales manager of Fifth Third Bank's Pasco County office. "With our 100-percent lot loan, buyers can purchase land at the current market price with no money down and, in time, use the land's equity as a down payment for a construction loan. When the buyer is ready to build, he or she pays off the lot loan and assumes a construction loan at a lower interest rate."

Again, this is good option as long as land value is increasing at a steady clip-and if you don't plan to build right away.

PAYOPTION ARMS

This ARM allows homebuyers to select one of three or four payment options each month, including a 1 percent minimum payment, an interest-only payment or a fully amortizing 15-, 30- or 40-year payment that includes both principal and interest. Interest rates for this mortgage adjust monthly, and payments adjust annually.

Darryl Derwort, district manager of GMAC Mortgage's office in Tampa, says the PayOption ARM works well for short-term buyers, but can be risky for those who only make only the monthly minimum payment, which typically does not even cover the monthly interest cost. The result? An escalating loan balance, known as negative amortization.

BUY-DOWN PROGRAMS

Once popular years ago, buy-down programs are making a comeback, enabling buyers to pay a below-market interest rate during the loan's first two years by paying additional points and fees at closing. Buyers pay the lowest rate the first year and a slightly higher rate the second year. During the third year, the rate caps out at a predetermined amount that lasts the life of the mortgage.

To save additional funds at closing, Floyd at Diversified Mortgage recommends asking the seller to pay some of the points.

Like conventional mortgages, today's financing programs have many variations and can be riddled with confusing facts and figures. Consequently both first-time and veteran homebuyers should approach the mortgage-application process with caution and common sense.

"It is essential to work with brokers who are reputable," advises Pagani of Palm Tree Mortgage & Capitol Funding Group. "Numbers are numbers, and if they don't add up, don't leave the table until you thoroughly understand all the figures and are completely comfortable with your financial commitment."