Interest rates are still near a historic bottom, but uncertainty about how long that will last is prompting many New York City homebuyers to opt for adjustable-rate mortgages with longer fixed-rate periods.
Before the wider availability of variable rate products, buyers were generally limited to adjustable mortgages with one- to five-year fixed-rate introductory periods. As lenders adapt to keep up their loan totals with new products, New York buyers are taking them up on it, opting to pay a slightly higher rate to lock in a few more years of stability. Mortgages with five- to seven-year, and even up to 10-year, fixed-rate introductory periods are far more common, according to mortgage and real estate brokers.
“In the last year or so there have been more people using five- to seven-year adjustable rate mortgage products,” said Prudential Douglas Elliman broker David Rosenberger.
As housing prices climb, New Yorkers are turning to adjustable-rate, interest-only and even 40-year term loans in order to afford mortgage payments.
Many economists don’t like what they see. As interest rates rise, many are concerned that homeowners will not be able to handle the higher mortgage rates that they may face when introductory periods expire. Although the aftermath of Hurricane Katrina was expected to slow the rise in interest rates, an increase is expected to come sooner rather than later.
But mortgage brokers contend that, in addition to the fact that many New York buyers will likely have the financial wherewithal to weather future financial storms, the city’s co-ops may be another safeguard against problems.
Most co-ops require buyers to put anywhere from 20 percent to 80 percent of the purchase price down in cash, and some boards have reacted to the well-documented concern about easy access to credit.
“Co-op boards are being more stringent in how they analyze buyers,” said Melissa Cohn, president of the Manhattan Mortgage Company. “In some cases they are only approving a buyer if they take out a fixed-rate loan.”
There may be less protection in the growing condominium market. Condos don’t come with the scrutiny of a co-op board and many buyers are putting 10 percent to 20 percent down. At Clinton Mews, a new condo development at 516 West 47th Street, Gregory Socha, senior loan officer at the New York Mortgage Company, said the majority of the buyers of the 150 units there are using ARMs for units that range from $350,000 for a studio to $820,000 for a two-bedroom.
Some mortgage brokers aren’t so sanguine.
“Just because the mortgage has the lowest payment is not the excuse to take it,” said John Commons, president of Commons Financial Inc. in Oyster Bay on Long Island and president of the New York Association of Mortgage Brokers. “I don’t think people truly understand what they are getting into.”
But Commons said he doesn’t expect access to credit to tighten any time soon. Housing values aren’t rising as fast, but they aren’t falling either. The variety of mortgage products will continue to be available as long as the secondary mortgage market largely controlled by Freddie Mac and Fannie Mae continues making credit easily available, Commons said.
The “more transient” nature of the New York housing market is another protection, says Cohn.
In other parts of the country, a first-time buyer may consider staying in his first home for a lifetime; many New Yorkers only plan to stay in an apartment for a few years and many will likely sell their apartments before adjustable-rate mortgage periods are over, she said.
“New Yorkers are generally more sophisticated [about finances] and are generally going to refinance at a fixed-rate” before a loan is subject to an adjustable rate or reaches the end of the interest-only period, Cohn said.
And even if, for some reason, someone can’t avoid an interest-rate shock, in Manhattan, in particular, the incomes and net worths of many New Yorkers insulate them from the market, say some mortgage brokers.
“In Manhattan people aren’t (buying a home) for $250,000, they are spending $750,000, $1 million, $2 million and $3 million – those people are a different segment of the economy and can ride out the storms,” said Socha. “A lot of people in Manhattan come in with more equity and that really makes the market very different and a little less vulnerable to interest rate swings.”