Fixed-Rate Mortgages Preferred By Homeowners

[Jul 6, 2007.]

The end of the nation's housing boom has also meant a decline in the number of people opting for so-called "balloon mortgages."

With a balloon mortgage, a homeowner's monthly mortgage payment balloons when there's a rise in the interest rate. Such adjustable-rate mortgages were once seen as a way to enable homebuyers to pay out less money upfront.

But with so much uncertainty surrounding housing rates, balloon mortgages are appearing less and less attractive.

For instance, Wharton School of Business professor Susan Wachter was recently quoted in one press report as saying, "The consumer is getting more cautious and returning to the tried and true fixed-rate loan with insurance."

The number of applications for private mortgage insurance increased 56 percent to 191,525 in March, but volume declined in April. Still, April's rate was much better than last year's rate. Homebuyers are required to purchase private mortgage insurance when they would like a fixed-rate mortgage but have a down payment of less than 20 percent. The insurance usually costs less than one percent of the total loan. About 11 percent of new mortgages in the first quarter of the year were accompanied by private mortgage insurance, as reported by the industry newsletter called Inside Mortgage Finance.

Recently, financial institutions have been backing away from extending mortgages to individuals with poor credit histories. The trend is apparently linked to the large number of defaults and delinquencies in recent months.

Meanwhile, demand for so-called "piggyback loans" is declining. With such loans, homeowners contract for a mortgage for 80 percent of a home's value, pay ten percent in cash, then piggyback a second mortgage on top of the first to take care of the 10 percent that's left. The second mortgage usually involves a higher, adjustable rate of interest. As a result of the increase in interest rates, piggyback loans are becoming more expensive.

Julie Ann Amos
July 6th 2007
More Information:

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• Demand for Second Homes Increases
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• More Trouble in the Housing Industry
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