MISSISSIPPI STATE -- Consumers in the market for a new home have more financing options than ever before, but choosing an unconventional mortgage could lead to future financial troubles.

Gregg Ibendahl, agricultural finance specialist with the Mississippi State University Extension Service, said Mississippi housing prices have risen about 5 percent each year since 2002.

"Current median house prices have increased dramatically from 2002 to 2004. In the South, the average price in 2002 was around $140,000, and in 2004, the average price was $170,000," Ibendahl said.

Based on a 20 percent down payment, Ibendahl said Mississippi buyers' average income of $51,000 is sufficient to afford the median priced family house. A major problem, however, is that many consumers cannot afford a 20 percent down payment.

"The rapid rise in housing costs compared to incomes has caused consumers to undertake more creative financing methods," Ibendahl said. "Interest-only loans used to be a novelty, but now they make up 17 percent of loans. Adjustable-rate mortgages account for an additional 46 percent of loans. This use of nontraditional financing is occurring despite rates of below 6 percent on 30-year conventional mortgages."

These non-traditional mortgages require smaller monthly payments, which may indicate consumers are buying houses at the top end of their payment capacity, Ibendahl said. With an adjustable-rate or interest-only loan, consumers can get a more expensive house than they could with a conventional mortgage.

"There are a few major problems with these loans. First, interest rates are only fixed for the initial few years of the loan, and interest-only loans usually require principal payments to be added to the loan payment after five years or so," Ibendahl said. "In either case, higher payments will likely stretch consumers who were probably already near a maximum affordability when they bought the home in the first place."

Another problem with non-traditional loans is potential housing depreciation.

"If housing prices decline, consumers who are not paying much in principal could easily lose whatever little equity they started with. Any housing depreciation will make it difficult for consumers to change houses because they will have to generate money for a down payment from a source other than home equity," Ibendahl said.

Bobbie Shaffett, an Extension family resource management specialist, said potential home buyers should avoid risky financing alternatives if at all possible. Instead, choose a traditional 15- or 30-year fixed-rate mortgage.

Before beginning the search for a new home, consumers should determine how much they can afford to spend on a home monthly, how much they can afford for a down payment and the costs involved in closing.

"The general rule of thumb for deciding how much house you can afford is to use 1.5 to 2.5 times your annual income, depending on how confident you are about your earnings and the value of your home increasing," Shaffett said. "Another way to estimate affordable housing expenses is to stay within about one-third of your gross monthly income."

Local mortgage offices can provide estimates of the maximum mortgage an individual can obtain based on his or her budget.

Shaffett said a 20 percent down payment is ideal, but most consumers cannot afford such a large payment. Some mortgage companies will allow a 5 percent down payment, but the borrower must pay for private mortgage insurance until 20 percent of the loan amount is paid off. An often-overlooked expense is the closing costs associated with buying a house. These costs include attorney fees, a property survey, a title search, an appraisal, property insurance and other miscellaneous expenses.

Lenders are required by law to provide a good faith estimate of the cost of settlement services at the time a borrower applies for a loan. Shop around to find a lender and attorney with suitable fees and charges.