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Long-term fixed home loan rates are getting closer to those on shorter-term adjustable mortgages, but many East Bay home buyers still prefer the riskier ARMs because they offer lower monthly payments.
"Ten years ago, people would come in and say, 'I don't care what it takes, I want this house,'" said broker Jay Damato, owner of Elite Financial in Walnut Creek. "That has changed. Now people come in and say, 'This is what I want my housing payment to be.' You can tell them they can afford more, but they still say, 'No, no, this is what I'm comfortable with paying.'"
While most refinancing homeowners want a traditional loan, the majority of new home buyers want the least expensive monthly payment possible, he said.
"Basically I'm telling anyone coming in for a five-year adjustable rate mortgage they might as well get a 30-year, fixed-rate for the same price," Damato said. On Friday, he could offer 6.375 percent for a 30-year, fixed-rate mortgage and 6.25 percent for a five-year, adjustable rate home loan. It works out to be $32 a month difference on a $400,000 loan, he said.
But not everyone is biting.
For many buyers, the only way to afford a lifestyle of two cars, good schools and a nice house is with an adjustable-rate loan.
And Jason Doolittle, senior loan consultant for Western Security Mortgage in Danville, said that these alternative loans show no signs of slowing down.
"There's definitely not been a run on 30-year, fixed-rate mortgages," he said. "People say, 'I'm not ready to pay another $855 a month.'"
For others, interest-only loans provide financial flexibility.
Mike Townsend, 39, a Realtor for Intero Real Estate in Danville, swapped a 30-year loan with a variable interest rate for a five-year adjustable-rate loan but said it was a business decision rather than a way to score lower monthly payments.
Townsend said he thought about a 30-year, fixed-rate mortgage but declined because he does not plan on staying at his Walnut Creek home for more than three years. Plus, the ARM gave him a slightly better rate.
"An adjustable-rate mortgage is about having options. I have the option to pay the amortized rate or interest-only rate," he said.
For other buyers, lower payments are often the only option. Hans Johnson, a demographer for the Public Policy Institute of California based in San Francisco, said it all came down to monthly income for Bay Area home buyers.
"For many people, it's not a question of choosing a fixed-rate or adjustable-rate mortgage, it's, 'Do I buy the house with the adjustable rate or not?'" he said.
Monthly payments can vary widely with all the various flavors of alternative loans. A $500,000 mortgage can range from $1,666 a month for the minimum payment on a negative amortization loan to $3,160 a month for a traditional mortgage, Damato said.
That might explain recent mortgage trends. According to LoanPerformance, a San Francisco-based company that tracks interest-only and negative amortization loans, called exotic loans, the East Bay's consumption of negative amortization loans rose from 0.8 percent in 2003 to 39.3 percent of all new loans in the first four months of 2006.
Interest-only loans peaked in 2004 with 43.2 percent but dropped to 30.6 percent in 2006. Nationally, both kinds of loans only made up 35.1 percent of all new loans in the first four months of this year.
Local brokers said that they have seen those trends continuing.
"Cash flow is king," said Bob Visini, spokesman for LoanPerformance. "Some people, as long as they have a house, good credit and a write-off from Uncle Sam, are as happy as clams. ... Maybe they don't care about building equity in their house."
Doolittle said that exotic loans, where minimum payments cover interest and not the principal for a set time, can make sense for those who are "house-rich and cash-poor." And if the financial burden ever became too much, owners could always sell and capitalize on an appreciating market.
But with more houses sitting longer on the market and housing prices easing, that safety net could be disappearing.
"We are in new turf," said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. "Certainly there are implications for changes nationwide."
Baker said that if the market continues to flatline or even fall, many homeowners may find themselves with mortgages that are higher than their home is worth. "If you have a $400,000 mortgage and your house is worth $350,000, then it would be tempting to walk away," he said.
Robert Kleinhenz, deputy chief economist with the California Association of Realtors, agreed that riskier mortgages today leave little financial choice.
"There has been an increase of the number of households who have used these alternative loan products," he said. "If we had a serious economic downturn, we would see the housing market at considerable risk."
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