Beating the Cost of Mortgages

By Alexander Taylor

The bewildering array of new ways to finance buying a home

"I made the last payment on the house I today," cries Willy Loman's widow at the conclusion of Arthur Miller's Death of a Salesman. "We're free and clear." Many Americans still consider owning a home a virtual birthright, as well as a necessary inflation hedge. But today people are being forced to find ingenious and complex schemes to beat the high cost of achieving Loman's dream.

Mortgage rates in many areas have now surged to 16% or higher, and last week's tightening of credit will undoubtedly push them up farther. Although housing prices actually declined during the past three months, the cost of a home is still at levels that would have been considered exorbitant just a few years ago. The median price of a home in March was $66,700, up 7% in the past twelve months. In 1971 the average price of a new house was $25,200.

Today's high cost of borrowing has made the conventional longterm, fixed-rate mortgage as old-fashioned as Willy Loman's Studebaker. Virtually all banks in California stopped making such loans last fall. Hundreds of thousands of would-be buyers now simply cannot afford the big down payment or steep monthly charges involved in those loans. Herman J. Smith, president of the National Association of Home Builders, says that only about 4% of first-time home buyers can qualify for a 15% mortgage on a median-priced house. Therefore, people are turning to so-called creative home financing.

One solution has been for sellers to lend money to the buyers at a more affordable 11% or 12%. That cuts down on an owner's profit, but at least makes it possible to sell property in today's sluggish market. The National Association of Realtors estimates that half of home sales now involve some sort of seller financing.

Such deals, though, take business away from savings and loans or other lending institutions. Thus they are searching for ways to provide affordable mortgages, while still making a profit. Last month the Federal Home Loan Bank Board voted to allow savings and loans to issue variable-rate loans with interest charges that rise and fall with prevailing rates. The cost of the mortgage could be adjusted as often as each month according to an agreed-upon index, such as the yield on U.S. Treasury bills. Under this plan, a mortgage signed today at 15% might increase to 18% in a year or so, if interest rates continue to rise.

Lenders like the new mortgages because they do not have to worry about the loans becoming unprofitable. Many financial institutions today still have mortgages on their books at 6% interest, at a time when they are paying 17% or more to depositors. But the variable rate loans are unpopular with borrowers because of the uncertainty over the level of monthly charges. The payment on a $60,000 30-year mortgage at 9% is $483, but that same loan at 15% would be $758.

Home buyers who shop around will find a bewildering array of other financing gimmicks. These include: P: The Short-Term Balloon. Popular in California, these loans base monthly payments on a 30-year schedule in order to keep them low, but they usually also demand repayment of 90% of the mortgage within three to five years. The loans are often used by people who think that they are going to be transferred in a few years or by couples uneasy about the durability of their marriage.

P: Renegotiable Rate Mortgages. These loans, which are widely available in Chicago and Atlanta, give buyers more certainty than is offered by variable-rate mortgages. Interest rates are adjusted at regular intervals, usually between three and five years, but generally only by a maximum of 5% during the life of the mortgage.

P: Graduated Payment Mortgages. This plan, which is popular among younger couples who believe that they will soon be earning much more than at present, keeps monthly payments low for the first five years or so but increases them sharply after that.

P: Shared Appreciation Mortgages. Under this program, which was first used in Florida, the borrower can obtain a lower interest rate in exchange for giving the lender a share in the increased value of the house. When the property is sold, normally one-third of the capital gains that have been earned is owed to the bank or savings and loan company that made the loan. If the house is not sold within five years, the property may be appraised and the owner may have to pay the lender one-third of any increased value.

In Los Angeles, 80% of home buyers already use these and other nontraditional methods of financing. In one typical case, David and Jackie Bernstein paid for a new $295,000 home in Los Angeles with $1 10,000 earned on their old house, a first mortgage of $94,000 at 9.5% interest, a second one for $50,000 at 12%, and a third one from the seller for $41,000 at 15%. Then via a complex system of "balloon" payments, they were able to bring the actual interest rate down to 11.4%.

Financing a new home has now become so complex that the Chicago Association of Commerce and Industry and a local builder, United Development Co., have installed the "Home-Finance Answerline." A confused home buyer in the Chicago area can phone, and a mortgage expert will demystify the latest wrinkle in local real estate lending. Since the hot line was installed a year ago, there have been 10,000 calls.

--By Alexander Taylor.

Reported by David Beckwith/Washington, with other U.S. bureaus

With reporting by David Beckwith

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