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Adjustable-rate mortgage, ARM: A mortgage that does not have a fixed interest rate. The rate changes during the life of the loan based on movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index.
Interest: The price paid for borrowing money, usually given in percentages and as an annual rate.
Interest-only payment ARM: An I-O payment ARM plan allows you to pay only the interest for a specified number of years. After that, you must repay both the principal and the interest over the remaining term of the loan.
Prepayment penalty: Extra fees that may be due if you pay off the loan early by refinancing your loan or selling your home, usually limited to the first three to five years of the loan's term.
Principal: The amount of money borrowed or the amount still owed on a loan.
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Steamboat Springs Mortgage planner Ed Allbright says he's actually seeing significantly more business these days.
Allbright, who runs Columbine Mortgage in Steamboat Springs, recently sat down to give the lowdown on the national and local mortgage front. The Steamboat market isn't insulated from the breakdown in subprime lending and subsequent turmoil, he said.
Allbright started with discussion of the national problems. The issues started a couple of years ago, he said. The government wanted more people to own homes, he said, and the only market to tap consisted of people with low credit scores.
"The government got into the action : and as lenders got into this mode, they started opening up the market," Allbright said.
A lot of those people ended up with adjustable-rate mortgages in which they were paying little or no money down on the homes, he said. But Allbright cautioned against casting aspersions on ARMs.
"It's like a chainsaw," he said. "If I give you one, and you know how to use it, you can go out and cut a lot of wood. If I give you a chainsaw, and you don't know how to use it, you could end up in the hospital pretty quickly."
Many people with low credit scores and slim cash reserves didn't know enough about the ARMs, he said. Some had mortgages with prepayment penalties. Under those agreements, the homebuyer must pay - sometimes thousands of dollars - if they refinance or sell within a specified amount of time.
Although there might have been some mortgage brokers who pushed people toward inappropriate mortgages, Allbright said, a big part of the problem was the buyers.
"Either they ignored the warnings, or they were so determined to buy a house that they didn't take into account potential issues," he said.
The problem started to develop early last year, Allbright said, as hedge funds and others who invested in the subprime market started taking a major hit. That was partly what led to the fall of Bear Stearns this year.
Allbright didn't express much sympathy.
"It doesn't take a genius to see that if someone puts zero down or 3 percent down and has a credit rating of 660, there are going to be some issues," he said.
As the housing market has spiraled downward, confidence has gone way down, Allbright said. But people with ARMs shouldn't automatically switch to something like a 30-year, fixed-rate mortgage, he said.
Most people move every four or four and a half years, Allbright said. The higher interest rates charged for 30-year, fixed-rate mortgages often aren't worth paying if you're not in it for the long haul, he said.
The Steamboat market
In an affluent area such as Steamboat, subprime mortgages aren't as much of an issue, Allbright said. But housing market trends affect everyone, he said.
"A lot of people who are regional and national speculative investors bought extra property here, hoping to gather that 15, 20 or 25 percent increase in property that has happened over the past three years," Allbright said.
A lot of those people in Florida, California and New York, for example, are pulling back as they see property values drop, he said. Also, the mortgage industry has toughened its standards for investors who want to buy second properties, Allbright said. Lenders' caution made sense, he said.
"It's had a dampening effect on Steamboat, but I think that's a good thing," Allbright said. "Property values were increasing, and you can get a bubble event. If that bursts, it's much worse. When you don't have as many investors buying, the bubble is not under pressure."
The Steamboat housing market is slower than it was last year, he said, but that slowdown will help bring things back to normal.
Allbright had some basic tips for people who own or want to own houses.
Don't run from an ARM to another type of mortgage without talking to a pro, he said. Different types of mortgages work well for different people, and ARMs still are valuable, he said.
Those interested in buying a home should plan. Allbright suggested coming to speak with someone six months before you want to buy.
"People have to realize there are two critical components to getting a loan: You need better credit scores than you had to have six months ago and more money in reserves," he said. Those reserves include investments and other assets, not just cash in the bank.
Lenders are holding potential buyers to higher standards. For example, a lender might want to see a buyer have two times the mortgage payment in his or her reserves - after the down payment on the house.
Ultimately, Allbright said, there's nothing magical about being smart with your mortgage. The average person should be able to understand the system, he said.
"Common sense takes you a long way," he said. "You have to understand what they're doing and ask realistic questions."
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