Video: First-time homebuyers' dilemma

updated 6/2/2005 7:44:40 PM ET 2005-06-02T23:44:40

NEW YORK — Donna Schieffer and Charles Balandrin are on the hunt for their piece of the American dream — their first house.  But it’s an uphill climb in Chicago's idyllic Park Ridge suburb, where the average price is $465,000.

“It's a little more expensive on the north side,” says Schieffer.

Their price range is $200,000 to $300,000. So now they’re searching on the south side.

“We're going to get a lot greater value for our money,” says Balandrin.

First-time buyers are caught in a vise of rising home prices and growing competition from speculators.

“When there's blood in the water, you've got to start swimming faster, that's just the way it is,” says Balandrin. “The houses don't last on the market, at least not in our price range — nothing desirable.”

Yet the number of first-time home buyers has grown some 25 percent since 1999, helped by low interest rates and unusual loans such as “no down payment” or “interest-only” mortgages.

“People are really having to squeeze, take on leverage, take on mortgages they normally would not, because they just literally cannot qualify in a mortgage that's more traditional,” says Mark Zandi, the chief economist of Economy.com.

Jenny Loftus and her husband just bought a suburban Baltimore townhouse. Because he's in medical school, they got an interest-only loan to shave their payments.

“We didn't want to build that very little bit more of equity in those years when we could use that money in a savings account,” says Loftus.

But with today's loans, the interest-only portion lasts just three to 10 years.

“They have to pay interest and principal and they're going to be shocked by how much their monthly payment will increase,” says Vahan Janjigian with the Forbes Investor Advisory Institute.

How much more? On a $200,000 interest-only mortgage, the monthly payment could go from $812 to $1,155 when you start paying principal five years later — assuming rates don't rise.

And that can potentially turn a dream into a financial burden for the nation's newest homeowners.

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