Long-Term Home Loans Leave Florida Owners in Trouble
As a result of Central Florida’s recent strong housing market, longer-term home loans could put some home buyers in a financial bind.
Fred W. Jones, a real estate attorney with Graham, Builder, Jones, Pratt & Marks LLP and president of the Central Florida Real Estate Council, says that borrowers have become more creative with financing; but he worries that as the housing market slows, some owners may be pinched if forced by circumstances to sell their homes.
How come?
Because longer loans translate to less equity during the loan’s first five, opening the door to a situation where people could lose money on their investment.
Just ask mortgage lender Jim Rudd, a principal with South Florida-based Attorneys’ Mortgage Services. He notes that loans with such an extended payback period can be a double-edged sword.
“There are a lot of people in a precarious position right now,” he says. “They stretched to buy a house and did it under terms that made sense only if appreciation continued.”
But now these home buyers are being hit with higher property insurance rates, thanks to Florida’s recent active hurricane seasons, “and are finding themselves going against the tide,” says Rudd.
Finding the right home loan terms
Granted, a 40- or 50-year home loan term can be beneficial if it means getting more house for the money.
But only if the terms are right.
For example, Rudd says a 30-year, $200,000 mortgage sells for 6.125 percent, while a 40-year term is 6.25 percent (based on rates from Nov. 15.) This translates to a monthly payment of $1,231 vs. $1,218 - just a $13 difference in the monthly payment.
However, when mortgage rates are the same, Rudd says the difference in monthly payments could be $100 or more.
Before the current home appreciation slowdown, Rudd says people looked to get the least-expensive monthly payment on their Florida mortgages because they were betting on property appreciation to gain equity or profit.
Today, it’s a different story.
The Orlando housing market, for example, saw double-digit appreciation rates of about 13 percent to 15 percent during the last four years, but this year it’s less than 10 percent, says Pitt Warner, a real estate broker with the Winter Park Land Co.
During the next few years, appreciation will be relatively flat, meaning those without some form of creative financing could struggle to even get into a home, he says.
“If we have another big run-up in prices, people won’t be able to afford homes,” says Warner. “I think people will be going to these [bad credit home loans] in the future.”
Are 100-yearhome loans possible?
So, does that mean a 100-year loan is possible in the future? Jones doesn’t think it’s out of the question. He says banks only make money if they lend it out, and if the market needs to create loans with such long terms to appeal to the average buyer, it’s a real possibility.
“I never would have thought there would be 40- or 50-year loans,” says Jones. “But they are widely used in places. I never say never anymore.”