California Homeowners Face Unique Challenges

By Karen Lawson Columnist

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After years of astronomical increases in property values, California's housing market has softened, and huge home equity cushions are diminishing. Many homeowners are facing financial trouble as interest rates go up, or negative amortization increases their mortgage balances.


High Priced Housing Market Fuels Need for Exotic Mortgage Products

With average home prices in the high six figures, California homebuyers frequently can have problems getting a mortgage. The only way for many to qualify for a home loan is to accept a loan with terms that provide lower initial payments. Exotic loan terms can include:
  • » Interest only payments: For a specified initial period, you pay interest only on your mortgage. Your mortgage balance does not decrease during this time. When the initial period expires, your payments adjust to include principal and interest, and may further adjust according to market interest rates.
  • » Negative Amortization: This means that you will make partial interest payments on your mortgage for an initial period, and the unpaid amount of interest due will be added to the principal balance of your mortgage. This can impact your equity as your mortgage balance increases, and if property values decline, you home equity can also decrease.
  • » Adjustable rate: Adjustable rate mortgages generally provide for low initial interest rates for a period of several years, after which payments adjust to prevailing rates. These types of loans, often called ARMs, can be tied to fluctuating financial indexes that can make it difficult to determine how much your payments can adjust.
Exotic mortgage loans can help you buy your first home, and can be useful for other reasons depending on how long you plan to stay in your home, your future income, and other factors. It's a good idea to ask lenders to explain the exact terms of any mortgage loan you're considering, and to have a realistic idea of how much you can afford for housing expenses.

NPR News Report on California Foreclosures

About the Author
Karen Lawson is a freelance with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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