As interest rates climb, watch for pitfalls in mortgage financing

When Christine Abrams moved her growing family out of their Thousand Oaks condominium to a three-bedroom fixer-upper a few miles away, she didn’t realize the financial troubles that lay ahead.

Because of a new mortgage payment that has the family’s already-tight budget stretched thin, Christine is unable to pay for the home improvements needed on the home and has become trapped in a vicious cycle.

The Abrams are not alone. With the high cost of Southern California real estate, more and more Ventura County residents are finding themselves facing higher-thanexpected mortgage payments.

Enticed by low interest rates and rising home values, home-owners are taking riskier chances with loans. Instead of taking the traditional fixed rate loan for five, 10, 15 or 30 years, more homeowners are signing 100 percent financing loans and short-term adjustable rate loans, as well using negative amortization loans to buy property in a hot market.

Christine, a mother of four, and her husband, Chris, a chief petty officer in the Navy, moved into the white home with black trim off Ventu Park Road last March to make room for their baby daughter.

Chris, currently training for his third mission in Iraq, served in Desert Storm, Japan and Hawaii. He was also part of the Hurricane Katrina relief effort in September.

“With the four kids, after the baby was born, the condo was just too small,” Christine said. “We were squeezed into two bedrooms.”

To turn the dream into a reality, Christine used the money she made selling the condo, which she had purchased January 2004, to make a down payment on the new home.

The family was able to move because of a tax provision that allows a homeowner to sell a home before two years without paying a tax penalty because of the birth of their daughter.

“The three boys in one room were fine,” Christine said. “But because she is a girl, we needed to have another room.”

The down payment wasn’t enough, however, and Christine was advised to take a first and second loan for the house. To make the loan work, Christine’s second loan was “uncapped,” which means it’s at risk of rising with interest rates. It would prove to be a costly gamble, as interest rates slowly began to climb.

By late July, Christine’s ever-rising payments on her second loan were threatening to cost her the very home she was scrimping to save.

“I got really scared that we were going to lose the house at one point because interest rates were going up so fast,” Abrams said. “The payment . . . each month was going up $100.”

In an effort to save the house, Christine was able to refinance into a fixed 30-year loan. The mortgage rate stabilized, but Christine now pays nearly 67 percent of the family’s income to cover the monthly payment, nearly double the mortgage-to-salary ratio most experts recommend that homeowners budget.

Not alone

Dr. Jamshid Damooei, an economist at California Lutheran University, said the Abrams’ money problems are similar to more and more homeowners throughout the Conejo Valley and Southern California.

The problem, Damooei said, really begins when the housing market slows down, which, in turn, reduces the home’s appreciation value while interest rates begin to rise.

Eventually, rising interest rates begin to outpace appreciation costs and homeowners are unable to pay their mortgage rates.

“When that happens, people who have taken out loans. . . . find themselves doubly squeezed,” Damooei said.

Recently, the Federal Deposit Insurance Corporation released a report which examined the past 25 years in American real estate. The report offers numbers that show the real estate market is inflated, but it also said a burst in the real estate bubble won’t happen soon.

For economists like Damooei, that analysis may not paint the whole picture.

“Yes the real estate market is strong,” Damooei said. “But even Southern California is not immune to a downturn in the economy. . . . If inflation increases, which we are already beginning to see . . . so will the interest rate . . . that may become problematic for many people.”

Think ahead

According to Damooei, it’s important for homeowners to consider the future when taking a nontraditional loan. “People need to think five or seven years in the future,” Damooei said. “If they become unemployed . . . or if the market changes . . . people need to know if they can weather those tougher times.”

Alex Soteras, a mortgage broker in the Conejo Valley for the past 20 years, said there sevthe past 20 years, eral things h o m e o w n e r s can do to minimize their risk when taking a loan.

Firstly, applicants should consider the pros and cons of an adjustable rate versus a fixed rate loan. The decision often comes down to personality.

“There are some people who are more psychologically averse to taking an (adjustable rate loan) because they are typically more conservative and may be worried about it getting out of control,” Soteras said. “So if they have that nature, I tell them to take a fixed . . . and don’t worry about it. Bufor people who want a low payment and want the option of paying a low payment, I tell them to consider the (adjustable rate loan).” Soteras also said the besplan is for a borrower to get only one loan and not take a first and second loan. To that end, he recommends b o r r o w e r s stay away from 100 percent financing and invest at least a small amount into their loan to avoid taking a second loan.

Soteras said borrowers should avoid any loan that has a prepayment penalty over one year. He said by doing so, borrowers can pay off, refinance or sell the loan after a year without taking a prepayment penalty.

When looking for a reputable mortgage broker, Soteras said borrowers should shop around and compare. He said personal recommendations from friends and family help reduce the chance of ending up with a bad lender.

To help understand the costs, Soteras said it’s imperative that potential borrowers request a list of good faith estimates of all the proposed fees from the mortgage broker.

Finally, he said borrowers should never pay money up