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Are home buyers getting more conservative?

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But Yun disputes any suggestion that buyers are making larger down payments. Recent data suggests that while median home prices have dropped roughly 1 percent in the past year, today's borrowers are bringing slightly less cash to the closing table, he says.

Last year, a home buyer typically put almost 24 percent down, says Yun, citing data from the Federal Housing Finance Board. This year, the average down payment is closer to 20 percent. "People are taking out a little larger loan," Yun says.

At the same time, "there is a downward trend in adjustable-rate mortgages," says Yun. "So in a sense, borrowers are being more cautious of these types of mortgages."

With several lender bankruptcies coupled with tighter lending standards in the subprime market, "even if people wanted to take riskier subprime loans, they would have difficulty," he says. "Funding is just not there."

As a result, many low- to moderate-income households "will be moving into FHA government-backed mortgage products, which had traditionally been the choice of low- to moderate-income households," he says.

Yun also predicts that buyers soon will be making larger down payments.

Recently, there have been "so many disruptions in the mortgage market, I do anticipate that down payments will be increasing," he says. 

Interest-only loans remain popular
One nontraditional mortgage that's still flourishing: the interest-only loan. Almost 29 percent of mortgages in the second half of 2006 were interest-only loans, up 3 percent from the first half of the year, according to mortgage association data.

Interest-only loans are sometimes tagged "exotic" because they focus on paying the mortgage interest (rather than interest plus principal) for at least a period of time -- allowing borrowers to sign on for more house with smaller monthly payments. Proponents see them as a tool that allows buyers who will soon be earning a much larger paycheck to secure that more expensive home. 

The loans haven't received the negative attention that has plagued the subprime lending market recently, so the supply is still plentiful, says Brinkmann. That could change as regulators begin to take a harder look at these mortgages in the future, he says.

But interest-only loans are not just for people banking on bigger future paychecks. They also offer some flexibility that can be very practical in certain circumstances.

Dr. Jud Schoendorf never thought he'd opt for anything but a traditional, fixed-rate loan. But when he bought his 2,000-square-foot Long Beach, Calif., home in November, he was in a difficult financial situation. He was closing on the new home before selling the old one and would be carrying two mortgages in the interim. While he wanted to put a large chunk of his home profits toward the principal of the new home, he wouldn't receive that cash until after he'd taken out his new mortgage.

An interest-only loan would let him pay down the principal after closing and reduce his monthly mortgage payment. A fixed-rate loan wouldn't give him any flexibility in that area.

He selected a mortgage that converts to an adjustable rate after five years. But for him, the idea of an interest-only loan was a big departure from the norm. "I didn't like it," Schoendorf says of paying just interest and not the principal, too. "There's something more satisfying about being able to pay both."

With great credit and a large amount of equity in the new house, he's just waiting for the rates to drop below 6 percent to refinance at a fixed rate.

Based on the numbers, Schoendorf says, "It was well worth taking a chance that in the next four years the rates will come down."'s corrections policy-- Posted: Aug. 16, 2007
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