The basis of this loan officer’s argument was that interest only loans weren’t a great risk was a statistic that historically, single family homes appreciate at rate of 6%. No arguments there. This is a verifiable statistic. When a homeowner hits the balloon, they will be able to refinance the home using the appreciated value. It is a win-win situation! Real estate agents get to sell a larger ticket home and earn a bigger commission while home buyers get a larger, more luxurious home. Good for everyone, right?
Wrong! I didn’t buy this argument for one second! The problem with this theory is the Twin Cities had appreciation rates over 6% for several years in a row. In order to average at 6%, there are going to be some years with zeros ahead. I did not like this loan product and could not in good conscience recommend to my clients.
Of course many agents and homebuyers did like the argument. Thousands and thousands of people did use these loans to buy their dream homes. This is one of the reasons for the widespread foreclosures across the Twin Cities metro. The rate of appreciation in the Twin Cities had a dramatic drop to 0.48% for 2006 in the 13-county metro area. See chart below from the St. Paul Area Association of Realtors (SPAAR).
The news is not all bad. In the same period, the median value of homes sold in the 13 county metro area has almost doubled. The median price of homes sold in 1997 was $116,500 and in 2006, the median price is $230,000. So homes purchased in the late 1990’s, where owners have not taken an equity loan or refinanced, should have substantial equity.
If you are relocating to Minnesota, are looking for Homes for Sale in the north and east Twin Cities metro area and need help from a professional Realtor, give me a call. Serving Anoka, Chisago, Ramsey and Washington Counties in Minnesota.