Interest-only mortgage has a catch

Q: I'm a single woman starting the process of buying my first home. Of all the potential mortgages I've looked at so far, a five-year, interest-only adjustable-rate mortgage looks good because it would save me $200 a month. What are the pros and cons of such a mortgage?

A: There are different variations on interest-only loans, but it sounds like what you're talking about is probably a 30-year mortgage that has a fixed interest rate for the first five years.

During this initial period you'd pay only interest — nothing toward the loan itself. At the end of five years you begin paying principal plus interest, and your interest rate may be adjusted once a year for the remaining 25 years.

So in truth, that would mean you don't have an interest-only loan; you would have a deferred-principal loan that shaves five years off the length of time you have to pay off your mortgage, said Keith Gumbinger, vice president of HSH Associates, Financial Publishers.

"Your monthly payment will be higher as a result of the shorter term, and your rate could be notably higher when your loan begins to adjust," Gumbinger said. "It's a bit of a double whammy. Your savings from the first five years may evaporate very quickly."

As long as both home prices and your income keep climbing, you might be OK with this type of mortgage, Gumbinger said. Rising prices would provide the equity cushion you'd need if you were to sell and have to pay thousands in sale-related costs.

But if prices level off or decline and your income doesn't increase, you could find yourself in a world of hurt — unable to afford higher house payments and unable to sell without taking a financial bath.

Gumbinger thought an interest-only mortgage could be a good move if you can invest or bank the savings (in your case about $200 a month) as a financial cushion to soften the blow of what would be higher house payments.

Such a loan also could be a good idea for someone who's likely to make significantly more income in the next few years — a doctor just graduating from medical school, for example. But he didn't recommend this type of loan simply as a way of getting into more house than you could otherwise afford.

For more on the subject go to www.hsh.com and look for "The Principal Facts of Interest-Only Mortgages."

Q: Our landlord is selling our rental house halfway through our one-year lease, and we'd like to know what our rights are in this situation. Do we have to let real-estate agents and buyers in anytime they want? Do we have to allow a lock box on the front door? And if the house is sold, will we have to move immediately?

A: "Oftentimes when I have a landlord who wishes to sell, my counsel is to go to the tenants first and work out an accommodation — perhaps it could be a break on the rent," said Seattle attorney Ray Walters.

He also suggests that landlords negotiate a schedule when the house can be viewed.

"Things like that minimize the inconvenience to the tenants," Walters said, and that pays off for the landlord.

Otherwise, tenants might bad-mouth the place to whomever is trying to buy it, Walters said.

The state's landlord-tenant act does give renters some protections in these situations:

• Landlords must give them a day's notice before entering the dwelling at a specified time to show it to potential (or actual) buyers.

• Any lease that's in force during the sale must be honored by the buyer. Your rent can't be raised, and you can't be kicked out before the lease expires.

To protect your interests, Walters suggested you make a copy of your lease and post it in your rental house. That puts potential buyers on notice that such a document exists.

As for a lock box on the front door (which lets real-estate agents enter when you're away), Walters said the law doesn't address the use on rental property. However, he considered installing one a bad idea.

Q: A number of neighbors in our Queen Anne neighborhood are upset by a recent below-market private sale that involved a real-estate agent and an elderly seller. Are agents ethically required to list houses? This one never was.

A: There is no requirement that agents must list all properties with the Northwest Multiple Listing Service, said Mike Skahen, owner and broker of Lake & Co. Real Estate in North Seattle.

Occasionally an owner will have a personal reason for wanting to avoid such a listing, and that's OK, he said, particularly if the owner has a firm idea of the home's value. Ideally, that would come from having three real-estate agents provide a free market analysis.

Withholding listing a house in this kind of real-estate market can have adverse financial consequences, Skahen said. The number of houses available for sale in North Seattle is down 30 percent from last year, he said.

"Exposure is bringing multiple offers, so it's hard to say what a house will sell for," Skahen said. "Some sell for $10,000 to $60,000 over asking price."

The MLS emphasizes that a listing office is obligated to "fully expose a seller's property to the marketplace before recommending acceptance of an offer."

If you think your elderly neighbor has been taken advantage of, Skahen suggested that you talk with her to get all the facts. Depending on what she says, you may want to encourage her to file a complaint with the Department of Licensing at 360-664-6484. The department licenses real-estate agents and investigates complaints.

If your neighbor was taken financial advantage of by the agent, it could be considered fraudulent conduct, DOL spokeswoman Gigi Zenk said, and the agent's license could be revoked.