Alyce Garner, a first-time home buyer in 2002 in a new development in Columbus, Ohio, paid extra upfront to get a below-market rate on a mortgage that she could afford. The rate started at 4.7 percent. It was raised one percent in each of the next three years and was finally fixed at 7.7 percent-nearly two percent higher than the rate for the best qualified buyers.
“They got me in the house by making it affordable, but didn’t include taxes or homeowner’s association fees,” Garner said. She’s holding on and believes she can keep her house. She knows others who went for affordable subprime deals who are not as fortunate. “People in my neighborhood lost their homes because they couldn’t afford them when the payments went up,” Garner said. When there are several homes in a neighborhood that are in foreclosure, it brings down the value of the houses in that area. This can make it difficult and more economically painful for people to sell their homes if they find themselves in a situation where they can no longer afford their homes.
“I knew I was getting a raise every year, so it wouldn’t make a big difference when my mortgage payment increased,” Garner said. “I’ve also been working on improving my credit score so I can refinance at a lower rate, but there is a pre-payment penalty, so I don’t know if that would even make a difference in the long run.” Subprime customers are people who have blemished credit records. They usually do not qualify for the lowest interest rates prime because lenders judge them more likely to default on a loan. Consequently, they pay more to get a loan and they tend to pay more over the life of a loan.
From 2002 to 2004 mortgage rates were at record lows and lenders were competing to make loans. People were buying homes and first-time home buyers were lured into adjustable rate mortgages with low “teaser” rates. Sometimes they were not fully informed of the impact rising interest rates would have on their mortgage payments. Also, some loan products such as interest only loans make it virtually impossible for homeowners to make payments on the principal.
For young adults, home ownership has been a top priority. Many first-time buyers are weary of paying rent and are more inclined to buy a home and build equity as a step toward accumulating wealth.
Juan Jones, a real estate agent at Valley Real Estate in Westerville, Ohio, says the most important advice for first- time buyers is to make sure they’re comfortable with the monthly payments and get a fixed rate. “Buying a house is the most expensive thing one will purchase,” Jones said. “It’s important to do your homework and get what you can really afford.”
Like Garner, Jones states that many people are offered an opportunity to pay extra upfront to get into a house that may not be the most sensible deal for them.
“People are trying to get into houses without putting any money down,” Jones said. “Ultimately what’s important is that the buyer looks out for reputable mortgage brokers and also looks out for the closing cost.”