Adjustable-rate loans come home to roost

Squeezed by rising interest rates, homeowners who stretched their finances to buy properties while the market was hot are scrambling to pay higher monthly payments on adjustable-rate mortgages that were the least expensive option at the time they purchased their homes.

An end to years of double-digit appreciation in Massachusetts home values has shut the door on refinancings that bailed thousands of homeowners out of bad financial decisions, said mortgage brokers and counselors as well as homeowners.

''The bottom line is so many people took the fashionable mortgage rather than the right mortgage," said Harry Brousaides Jr., president of NorthStar Mortgage Corp. in Westwood. Now, he said, ''they're sweating it and not knowing what the future will bring."

The main culprit of homeowners' woes was a 50 percent increase in home values in Massachusetts between 2000 and 2003, the largest rate of appreciation in the nation. Buyers struggling to finance a home took on mortgages with low adjustable rates that nevertheless swallowed half their monthly take-home pay, leaving little financial cushion.

The first to experience difficulty are those with no-down-payment mortgages, a product that was popular among buyers who could not save enough for a substantial down payment on a high-priced home, mortgage counselors and brokers said. The no-down-payment loans got them into the market quickly, before they were locked out by rising prices. But, as rates increased, these loans, which often carry an adjustable interest rate, become more expensive.

''A lot of people live paycheck to paycheck, and they're losing a couple hundred bucks a month" due to higher rates, said Edmund Poli of Poli Mortgage Group in Norwood. More homeowners are coming to his firm for help, but ''sometimes there's not much they can do because they have 100 percent financing."

Rates have not risen that much yet. But if they continue to rise or if housing values fall sharply, said Thomas Callahan, executive director of the Massachusetts Affordable Housing Alliance, the current pinch on some homeowners may be the tip of the iceberg.

''People have put problems off by multiple financings and increasing equity," he said. As a last resort in a rising market, he said, people could sell the house and pay off the loans. But if prices decline, selling a house will not generate enough cash to pay off a loan.

''I have a sense it could get ugly soon," he said.

In March 2004, John Ryan, a postman in Brighton, received a no-down-payment loan for his $430,000, three-family home in Framingham. He and his wife, a nursing student, live in one unit. Rents from two apartments cover all but $900 of their $3,600 monthly payment, which increased after renovation expenses -- for new bathroom tile and kitchen cabinets -- were rolled into the second mortgage.

Ryan has what is known as an ''80-20" mortgage. The loan's advantage: it eliminates the need for mortgage insurance that can add at least $100 to monthly payments. The bulk of Ryan's home purchase price -- 80 percent -- was financed with a primary mortgage loan. A second loan financed the 20 percent balance of the purchase price.

Banks and mortgage companies offered 80-20 loans during the housing market's heady days when equity values were rising. There are no specific data on the volume of these loans. LoanPerformance, a unit of California-based First American Corp., said loans that are between 76 percent and 80 percent of the purchase price grew to one in three US mortgages last year, up from one in four loans in 2000.

''That's a fair-sized jump" and is ''partly attributable to the popularity of 80-20" financing, said Bob Visini, vice president.

Typically, at least one of the loans -- usually the smaller one -- has an adjustable interest rate. The introductory rates on both Ryan's loans were fixed, but for only two years. He currently pays a 6.4 percent fixed rate on the large loan and 9 percent on the smaller one.

His grace period ends in March when the 6.4 percent rate -- and payment -- will adjust and begin floating. The new rate will be based on the prime rate, which was 4 percent when he purchased his home. But it has spiked to 7.25 percent as the Federal Reserve Board raised rates in recent years.

Ryan is the type of consumer who always looks for the hidden costs when someone is selling to him, but he agreed to an 80-20 loan because he had no intention of living in the house long term.

Now Ryan's plan to refinance to get himself out of a tight spot is clouded by worries that a loan appraiser will not value his property high enough. Last June, an appraiser told him the house might be worth $535,000. Since then, two similar properties on his street sold for $450,000 and $460,000, which may pull down his appraisal, he said.

''Because the market's dropping and rates are going up, it's affecting refinancings and appraisals," he said. ''You have to hang on and wait for things to swing up again."

Ryan's situation is ''very common," said Steven Stolovitsky, Boston director of the Neighborhood Assistance Corp. of America, a national organization that counsels and finances home buyers. Lenders charge higher rates for no-down-payment loans -- even for customers like Ryan with good credit -- to compensate for the risk of a property with no equity.

''So many people went rushing into the market because they didn't want to be left, but now these people are strapped," he said.

Todd Mack, who works in the housing industry for MMA Financial, knew what he was getting into when he financed his Brighton home in August 2004 with a 4.875 percent mortgage that is fixed for the first five years, and then begins floating. Mack has ''significant equity" and no regrets about the loan, which saved him a lot of money.

Yet, with rates up, Mack wonders: Now what? Should he stay with his loan, in the hope Fed rate hikes will end soon, or convert it to a fixed rate before rates rise further?

''It's difficult because if you don't act now you'll miss out on low rates," he said.

Kimberly Blanton can be reached at blanton@globe.com.