Here's a recipe for unhappy homeownership:
- Get a mortgage with an interest rate of 10.5 percent or more.
- Find out the mortgage has a pre-payment penalty, meaning that if you refinance you'll have to pay a hefty fee.
- Have such a shaky financial situation that you're not sure how you'll make the mortgage payment for the rest of the year.
Unfortunately, that's an accurate picture of what happens to millions of Americans with bad credit who nevertheless manage to buy a house under onerous terms, a new survey by the big mortgage financer Fannie Mae found.
"This survey helps to explain the explosive growth in the sub-prime mortgage market, which often is the only source of mortgage credit for credit-impaired borrowers but at some of the highest rates in the market," said Fannie Mae Chairman Franklin Raines. "In many cases, consumers that can afford the least are paying the most to finance a home."
The survey found that 45 percent of homebuyers with bad credit had an interest rate higher than 10.5 percent and about half had gotten their mortgage through a telephone or mail solicitation where lenders of last resort often lurk.
These costly mortgages often came with a pre-payment penalty, putting the homebuyers in a box. Even if they cleaned up their finances and qualified for a lower interest rate eventually, they would have to pay a fee to get free of their high-rate loan.
Among borrowers who had been rejected at least once for a mortgage, the terms they finally got were usually dismally unattractive. Sixty-three percent of this group had an interest rate exceeding 10.5 percent and nearly half also had a pre-payment penalty. Six out of 10 said they were worried about making their mortgage payments.
Why would anyone put themselves in such difficult circumstances to buy a house?
"The survey found that the desire to own a home is so intense - the benefits are so compelling - that many consumers are willing to go to extraordinary lengths to secure the financing," Raines said.
Raines said it's time for the mortgage industry to consider whether it can help more people clean up their credit problems so they can qualify for better loans and to see if some are being steered into high-cost loans when they could qualify for something better.
If you have made a mortgage payment 60 days late, declared bankruptcy or been through foreclosure in the past three years, or had a car repossessed, you're considered a high credit risk. Other factors that work against you are having a bill referred to a collection agency, having all your credit cards near their limits, getting paid in cash and having no credit cards.
Before responding to a lender of last resort, ask yourself how you might get in a better financial position and how long it would take. There's no point in buying a house if all it's going to bring is more financial grief.
The Fannie Mae survey, done by professional pollsters in May, also found:
- The percentage of renters saving to buy a house dropped from 20 percent last year to 16 percent this year. Yet 43 percent of renters said it is likely they will buy a house in the next three years.
- Eighty-three percent of those surveyed know that a mortgage settlement statement should not include junk fees - document preparation fee, underwriting analysis fee, tax escrow fee, escrow fund analysis fee - even though these fees can be legally added by the lender seeking to increase his profits at the buyer's expense.
- As Americans become more familiar with the Internet, they are less willing to use it for such a big financial step as getting a mortgage. The proportion that would probably or definitely not use the Internet to apply for a mortgage increased from 39 percent last year to 59 percent this year.
Mortgage interest rates plummeted this week (July 19), according to a survey by Freddie Mac. The national average for a 30-year fixed-rate mortgage fell to 7.08 percent from 7.21 percent last week. The average for a 15-year loan dropped to 6.65 percent from 6.76 percent and the one-year adjustable declined to 5.62 percent from 5.79 percent.
All these mortgages are widely available when you pay one point, a fee that is equal to 1 percent of your mortgage.
(Distributed by Scripps Howard News Service, http://www.shns.com)