Date October 12, 2004
Time 12:00 PM - 12:30 PM
Station CNNfn
Location Network
Program Open House

SUSAN LISOVICZ, host:

We begin with zero down mortgages. It sounds like a dream for first-time homebuyers, but no money down has its pitfalls. Namely, the loan will cost a lot more in the longrun.

Joining us now with more on this is Bob Moulton, president of Americana Mortgage Group. He is also taking all of your mortgage questions. So, give us a call at 1-800-304-3638.

Welcome, Bob. Good to see you.

Mr. BOB MOULTON (President, Americana Mortgage Group): Good to see you too, Susan.

LISOVICZ: I am a new homebuyer.

Mr. MOULTON: Congratulations.

LISOVICZ: I thought I knew everything about mortgages. I did not hear of zero mortgage down. It is so tempting. No money down. That is what it means, right?

Mr. MOULTON: No money down. It is a great mortgage for first-time homebuyers, maybe young doctors, people fresh out of college, people who have not had the time to accumulate a down payment. The rates are higher. It is not for everyone. There are some risks associated with it, particularly if appraised value starts to decrease, which is always something that people are talking about.

LISOVICZ: You mentioned youth and salary. These are the types of things that I guess the lenders will be looking at. Youth, because you don't have a credit history, but that you have the prospect for a good income?

Mr. MOULTON: Yes. A young married couple, maybe out of college about four or five years, that have gotten good jobs, that have not had the time to build a down payment, they would be preferred for this loan. They might be fresh in their jobs.

LISOVICZ: Are we talking about any limitations, in terms of the price of the home? I mean, would you really be maxing out? Is it for more moderate prices? Where do you draw the line here?

Mr. MOULTON: The median home price in the US is $183,000. These loans are generally geared towards the conforming loan limit, which is about $333,000. So, they are depending on where you're looking and where you're living. If you're in a metropolitan area such as New York, San Francisco, or Los Angeles, it's going to be difficult to find a home for $280,000 or $300,000. But if you're in the Midwest or in a non-urban area, you can find a home for about $300,000 or $330,000.

LISOVICZ: We should say that your company, Americana Mortgage Group, does offer these zero down mortgages.

Mr. MOULTON: Yes, we do. There are two ways we can get people into a home with a zero down mortgage. The first is a conventional one mortgage, which is a higher interest rate, which is about 0.75 percent higher. The other is with what's called a piggyback, an 80 percent first mortgage and a 20 percent second mortgage. This way they can avoid PMI.

LISOVICZ: These, I think you were saying, are about five years that they've been around. What kind of popularity have they achieved over the last five years?

Mr. MOULTON: Well, a lot of people call and inquire about the zero down mortgages. But then when they look at the payment and maybe they discuss this option with their family, there is frequently gift money available from mom and dad or an aunt or an uncle or something like that. Although we consult with a lot of potential homebuyers on the zero percent down mortgages, a lot of people are not comfortable with that high payment and with the fact that real safe values can change over time.

LISOVICZ: Right, and we'll get to that. One of the pitfalls is just simply missing one payment. It's bad for any kind of mortgage that you carry. But does it take on special difficulties if you miss one payment?

Mr. MOULTON: If you miss one payment, you're technically in foreclosure. So, you need to go to budget counseling before you close on your mortgage to qualify for a zero percent down payment. So, the borrower really needs to understand what their commitment is to the lender.

LISOVICZ: Scary. If you're in foreclosure, what does that mean, that the bank can take your home away?

Mr. MOULTON: It usually takes time. It takes six to 12 months for the bank to actually do that. But even if you did have a zero percent down payment and you miss your mortgage payment for month, you're technically in foreclosure. So, anyone taking any mortgage from any lender should try not to miss a payment.

LISOVICZ: That is a huge pitfall. I'm on the opposite end. I put 20 percent down for my first home. I'm paying it off early. I had a 15-year mortgage and I'm paying down probably in 12 years just because I want that monkey off my back. One of the things that worked for me and for millions of new homeowners is the mortgage rates. But it is changing. We're going to higher interest rates. That is a definite con, right?

Mr. MOULTON: Right.

LISOVICZ: A problem for people who have the zero down.

Mr. MOULTON: Well, if they get themselves into a fixed rate mortgage, they'll be protected over the third-year period, if they lock into a mortgage now while rates are still relatively close to the 40-year low that they've been for the last two years.

The Fed has raised rates over the last few months. However, we're not seeing it transcend into the mortgage rates. The mortgage rates still have been holding at about 5.5 to 5.75 percent. However, if the Fed increases again next month, we should see higher mortgage rates probably by the end of the year and early into next year.

LISOVICZ: But doesn't it take forever to build equity into your home? That's why I'm thinking I can see the light at the end of the tunnel.

Mr. MOULTON: Well, if you have a zero percent down mortgage, it's very hard to build equity. It's going to be a combination of how quickly you pay your mortgage off and what happens to real estate values.

LISOVICZ: That's when you establish your credit if you're doing other things. For instance, if you're buying a business or buying a car. Those things that will hurt you, right?

Mr. MOULTON: That will go into your debt-to-income ratio. With the zero percent down, they'll look at 40 percent of your income as being eligible to qualify for your principle interest, which is your mortgage payment, your real estate taxes, your PMI, and your homeowner's insurance.

LISOVICZ: One other thing I wanted to get to quickly is that the big debate about whether this is a bubble in housing. That is yet another problem for the zero down, right? Because if in fact, we do have a recession, that is a problem where you have so much time left on this house.

Mr. MOULTON: That is the million dollar question everybody has been wondering. When is this housing bubble going to burst. The real estate market has been the strongest segment of our country for the last ten years. Back in the late 1980s and early 1990s, we did have a setback of about 10 percent real estate prices. Some people are calling for that setback to come again if the economy doesn't pick up as quickly as a lot of the government officials are hoping.

LISOVICZ: Bob Moulton, president of Americana Mortgage Group. Great tips today on yet another type of mortgage available to homeowners, but it is not for everyone. Thanks so much for joining us.

Mr. MOULTON: Thank you, Susan. Thank you for having me.