Housing Boom or Mortgage Bust?

A warning for homebuyers trying to save money: taking out interest-only or other risky loans could leave you unable to pay your monthly mortgage.

Thursday, Federal Reserve Chairman Alan Greenspan warns the current housing boom could financially bust millions of Americans.

That means if home prices fall or interest rates rise, you could be in trouble.

Still it seems some local homebuyers are willing to take the chance.

"We had some friends who lived in the neighborhood," recalls Tim Braun.

He bought a house just two months ago.

"Houses just keep going up and we have a growing family and decided if we don't buy now we might not be able to afford a house later that we fit in well."

Braun says he knew what they could afford. "We ended up going with a plan that's a little unique, it's a 30–year fixed rate but interest-only for the first 10 years."

"Interest–only loans are certainly more in the main stream these days," says Dirk Todd, President of the Wisconsin Association of Mortgage Brokers and Red Letter Mortgage.

He says they can open up more money, but they can also cause financial trouble.

"They allow people to not make any equity payment or not do anything with that money in terms of savings," says Todd, "Therefore, at the end of the period of time where it's interest-only, they're literally right where they started on their equity position on the loan."

Even riskier: a negative-amorizing loan, which gives you a low start rate, but then multiplies.

Most conventional banks here are not offering those rock-bottom rates.

"The amount that's not being paid to reach minimum threshold goes on top of their mortgage so they're increasing the size of their mortgage if they continue to make that low payment," says Todd.

Right now Braun is just paying interest because he says his money is better spent elsewhere.

But he's planning to pay more down the road.

"We are saving money still and we're investing it in other places," says Braun confidently, "Which I feel is a better investment now than just paying down the principal on the house."

The choice is yours.

Todd also says the Wisconsin Association of Mortgage Brokers does receive complaints from customers who claim they're being pushed into less than ideal payment options without full disclosure.

Another note, Greenspan says more interest rate increases are likely to come, expect a tenth quarter-point hike in early August.

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