Realtors Warn Borrowers About Risk of Specialty Loans

The NAR (National Association of Realtors) warned homebuyers about the risks of specialty mortgages that offer low initial payments.

The real-estate trade group joins the Federal Reserve Board and bank regulators who have been speaking out recently about the possibility that these types of loans could lead to trouble, an increase in defaults. These types of loans help buyers qualify to purchase a home in high-cost areas when otherwise couldn’t have been able to afford them.

The Realtors group said home buyers “may not realize that monthly payments on some types of specialty mortgages can increase by as much as 50% or more when the introductory period ends.

These specialty mortgages in question include interest only loans with rates that adjust periodically based on fluctuations in the interest-rate index. Another popular type of loan is known as Option ARM (I explained the basics in my previous blog). When a borrower chooses to make the minimum payment option, the balance of the loan grows, negative amortization.

California has had many borrowers acquire these types of loans because home prices have soared. The danger lays when homes become harder to sell and loans more difficult to refinance if the housing market drops.

These types of loans have been over-marketed and oversold specially in the Hispanic community where many borrowers put their trust on their mortgage broker and don’t bother to get an explanation of the risks these loans carry.

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November 13th, 2005 · Filed Under Mortgage - Loan Information

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