By Frederick W. Jones, Real Estate Attorney
The good news is that Orlando is a favorable place to purchase a home these days, even as homeowners in much of the rest of Florida and the country are experiencing a flat housing market.
The not-so-good news that is there is an increasing chance that housing prices may be a tad inflated due to a wave of new kinds of mortgages that contradict the traditional views of homeownership as a way to build personal wealth.
In the old days, way back in the 1990s, the economy hummed along and many people refinanced their 30-year loans into 15-year payoffs. You may have heard them around the water cooler boasting about how soon they'd be debt-free.
Now many people are treating the mortgage on their home almost like a revolving credit card debt. With interest only loans, adjustable rate loans and mortgages with terms of 40 and even 50 years, the day until equity builds becomes more distant than with conventional loans.
How does this create an inflated housing market? In the Orlando area, the average sales price of existing houses consistently appreciated over the past year, according to the Attorneys' Title Insurance Fund's Real Estate Index. Meanwhile, we saw a big jump in the popularity of long-term and exotic loans.
The reason most people choose long-term and adjustable loans is to get more home for the same monthly payment as they could for a 30-year fixed rate mortgage on a less expensive home. So simple economics tells us that to the extent people are stretching to get the most house with long term and exotic mortgage loans is in direct proportion to how much housing prices are inflated.
Even with the growing popularity of longer term and exotic loans, about 70 percent of homebuyers in the country borrow with a 30-year fixed mortgage. So it's not like everyone has abandoned your grandparent's vision of the "American Dream" - building personal wealth by gaining equity in a home.
The difference between the old vision and the new approach to mortgages is not much different than the difference between putting $100 in a savings account versus playing $100 at a blackjack table. Sure, the upside to doubling your money in a short period of time is enticing. But that doesn't make the blackjack choice the rational one if the $100 is something you'd rather not lose.
By far the biggest gambles on future home appreciation are the loans that allow interest only payments, or have adjustable rate provisions that could cause big payment increases in three to five years. These assume quickly rising real estate prices, which is out of a homebuyer's control.
But what about 40-year fixed rate loans or 50-year mortgages with rates that adjust after five years? They seem to permit equity building.
Homebuyers should ask their real estate attorney for advice on the different mortgage products available. The real estate attorney doesn't have a vested interest in the terms of your loan and can provide an objective opinion about the loan's costs, implications and benefits.
Let's look at some of the pros and cons of signing up for a mortgage with a term that will last until your golden years.
Pro: Most borrowers don't live in their houses for 30 years, so a longer-term loan makes no difference.
Con: The longer-term loan is usually at a higher interest rate than a fixed 30-year loan and builds equity much more slowly. So the borrower who entered into the shorter-term fixed agreement is probably in better shape if he needs to sell in five years. In the unlikely event the homeowner with the 40-year loan stayed in the house until it was paid off, he will have paid many thousands of dollars more in interest than with a conventional loan.
Pro: With a 40-year or 50-year loan the borrower can buy a home he wouldn't be able to afford with a mortgage over a shorter term.
Con: While that's true, the difference isn't as much as you might think - especially in the case of a 40-year fixed loan. A well-known home lender uses an example on its Web site that says the monthly payment on a 30-year, $100,000 mortgage at 6 percent would be about $600. With a 40-year mortgage the interest rate would be slightly higher, say 6.25 percent, and the payment would be about $568. With the 30-year loan the interest would be $115,838. With the 40-year loan interest would total $173,000.
Pro: If you're just starting out in your career, a longer-term loan could help you buy a house you otherwise couldn't afford. When your income goes up, you can refinance.
Con: If you're just starting out in your career and buying your first home, this is an important time to do a lot of research before making a decision that is likely to pay off only if your income soars and the housing market steadily increases. Research your options and ask someone objective to take a look at the short list of what looks best to you.
Not that a 40-year or even 50-year mortgage is a bad option for everyone. High-income earners who use mortgage interest payments as a major tax deduction could benefit. And it might make sense for rental property in some circumstances.
Even though a high-income earner or landlord is likely to be more market savvy than the younger buyer who might be attracted to these loans, the same advice applies: Let your real estate attorney look over the mortgage options you're considering before you sign the paperwork.
Fred W. Jones is a Board Certified real estate attorney in the Orlando area. He is the president of the Central Florida Real Estate Council and a member of The Florida Bar, the Orange County Bar Association and Attorneys' Title Insurance Fund, Inc. For information on real estate in your area, log onto: www.centralflrec.com.