2009 Real Estate Guide
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Today's mortgages: back to the future

When it comes to mortgages, everything old is new again.

If you bought a house in the 1960s or '70s, you'll feel right at home with the current lending options. The exotic products -- such as interest-only, no-down payment, no-doc and piggyback loans -- are all but gone. Back in vogue are the old standbys:

1. The 30-year, fixed-rate mortgage.
2. The recently ignored FHA loan.
3. Loans backed by the U.S. Department of Veterans Affairs.

Adjustable-rate mortgages remain on the landscape, but consumers are avoiding them like the plague.

"It's back to the future," says Keith Leggett, senior economist at the American Bankers Association. "Today you're looking at the old, traditional, conservatively underwritten mortgage."

"ARMs have really dropped in importance," he says. Borrowers were "penny wise and pound foolish. They didn't really factor in that costs would rise when rates reset." Few could foresee a housing market in which borrowers couldn't refinance or sell if things got rough.

Conventional mortgages

The 30-year, fixed-rate loan, "the old reliable," is back, says John Mechem, spokesman for the Mortgage Bankers Association. With rates right now around 5 percent to 5.5 percent, this loan makes up about 98 percent of the current market, he says.

Its cousin, the 15-year fixed rate, is not quite as popular, despite a rate difference of only three-eighths of a percent, because the shorter term means significantly higher monthly payments. They're "good for someone who can afford larger payments and wants to pay off their home quickly," Mechem says.

The resurgence of the conventional, fixed-rate loan doesn't mean it's easy to get, however. To obtain a non-FHA, "conventionally underwritten," fixed-rate bank loan, "you have to be gold-plated," says Leggett.

In the aftermath of credit crunches, rising interest rates, job flux and inflation, many consumers are lacking that luster. Even those who still shine might not be able to meet higher down payment requirements. Mortgages with 5 percent down are hard to come by, says Leggett. "I think you're looking at 10 to 20 percent down, and I think to get the best rate, you are going to have to have 20 percent."

FHA-backed mortgages

"The greatest change we've seen with the disappearance of the subprime market is the meteoric rise of FHA loans," says Mechem.

The FHA doesn't actually make loans. Rather, it insures loans made by approved lenders, thereby protecting them against losses if homeowners default on their mortgages. It is the largest mortgage insurer in the world, insuring more than 34 million properties since its inception in 1934.


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