Pricier fixed-rate mortgages tripping up first-time buyers

Along with higher home prices and a tight credit market, first-time homeowners are facing another headache as rates on fixed-rate mortgages increase steadily.

The higher rates mean fewer buyers can take the initial plunge into homeownership. While first-time buyers normally account for about 40 percent of home purchases, in May this figure stood at 28 percent, according to a report from the National Association of Realtors cited by the New York Times.

The increases have also resurrected adjustable-rate mortgages, or ARMs, which were considered partially responsible for the housing collapse, as borrowers took out loans they later could not afford. ARMs are making a comeback because of the lower “teaser” rates offered in the first few years of the loan, the Times said.

The initial rate on a five-year ARM, for example, can be as little as three percent, while 30-year fixed rates inch closer to 4.5 percent, according to the paper.

“People tend to look at what’s cheapest,” Marc Schwaber, a New York City-based mortgage professional, told the Times. “But that ARM rate that starts in the threes could eventually end up in the nines.” [NYT]  – Hiten Samtani