Money: Are You Overleveraged?

The American dream of homeownership used to have relatively simple requirements: a 20% down payment and a 30-year fixed-rate mortgage. Not anymore. For today's first-time home buyers, financing has become far more creative, complex and confusing. Faced with record-high real estate prices, new buyers are turning to so-called specialty mortgages designed to make homeownership possible even with a checkered credit history and little or no down payment. Specialty loans used to represent only about 3% of the mortgage market, but a survey by the Federal Reserve shows that they now account for more than a quarter of new business at some of the nation's largest home lenders.

Still, not all trends are worth following. Although specialty mortgages often have seductively low introductory interest rates, the long-term costs may be more than you bargained for. Here are some loan options to consider--very carefully.

•NO MONEY? NO PROB Scraping together the traditional 20% down payment is the biggest hurdle to homeownership, especially with home prices up an average of 54% over the past five years. That may explain why a recent survey by the National Association of Realtors found that a startling 43% of first timers signed up for no-money-down mortgages. But financing 100% of your home exacts some extra costs, like private mortgage insurance, which most lenders require for a down payment of less than 20%. On top of a larger than average down payment, you may also be saddled with a premium--generally about 0.5% of your loan--during the first year of payments. But the biggest danger is that you may end up owing much more than your home is worth. That's especially true in the red-hot real estate markets along both coasts. "These loans are a losing proposition," says Dean Baker, a co-director of the Center for Economic and Policy Research. "When these markets cool down, the people who can least afford it will end up with the biggest monthly payments."

•LOANS OF A LIFETIME You thought 30 years was a big commitment, so how about 40 or even 50 years? Ultra-long-term loans stretch your fixed-rate payments over nearly a half-century. Extending your loan 10 or 20 years would lower your monthly payments, but you may not save so much as you would expect. Let's say you had a $200,000, 30-year mortgage at 6% interest. Your monthly payment would be $1,199. Since lenders consider a 40-year mortgage a bit riskier, they usually charge an additional 0.25% in interest. So that $200,000 loan would probably carry a rate of 6.25%, making for a monthly payment of $1,135. Total savings: only $64 a month. And because of that 40-year loan's higher interest rate, you would pay about $3,486 more in interest during the first five years.

•YOUR BEST INTEREST? Taking out an interest-only loan means that at least initially, all you're paying back is interest; you're not making a dent in the principal until after the interest-only introductory period, typically five or 10 years down the road. So if you bought a $300,000 home, put down 10% and signed a 5.75% interest-only adjustable-rate mortgage, you could expect monthly payments of $1,294. But interest rates are low now. If after five years they inch back up to a more normal 8.75%, you would find yourself staring at a $2,200 monthly mortgage payment. Whose bright idea was that?