Low rates stir interest in ARMS But flexible loans aren't for everyone

July 05, 1992|By James M. Woodard | James M. Woodard,Copley News Service

"How does a home mortgage interest rate of 5.5 percent sound to you?"

That question came from Allan Stone, vice president of mortgage lending at a large regional bank. That interest, now available, is lower than the prevailing rate of interest when my wife and I bought our first home in 1956.

At that time, we thought our 6 percent mortgage interest rate was a really good deal. And later, as rates zoomed into double-digit figures, we thought we'd never again see rates below 10 percent.

Of course, that current 5.5 percent quote needs to be examined carefully and compared with other loan types. It applies to an adjustable-rate mortgage for the first year only. The rate then floats with an index tied to Treasury Bill rates.

But today, that would only bring the rate up to about 7 percent -- still an amazingly low interest rate compared with a couple of years ago.

"The interest rates on ARM loans are now so low many people are swinging over to them from the traditional 30-year fixed-rate mortgage," Mr. Stone said. "There are a wide range of mortgage plans now available, including ARMs, fixed-rate, combinations and convertibles."

Mr. Stone noted that the fixed-rate 30-year mortgage loan still is favored by most homebuyers and homeowners who refinance their mortgage. But recently ARM loans have gained in $l popularity.

One reason ARM loans are becoming more attractive is the more flexible underwriting criteria being used to qualify borrowers, according to Linda Mueller with Great Western Financial Corp.

Many homebuyers who qualify for an ARM loan would not qualify for a fixed-rate loan. Thus, today's ARM loans are making it possible for more people to buy a first home, and for others to move to better homes, Ms. Mueller said.

However, many homebuyers will never be happy with a home mortgage rate that "floats" with some index. They want the peace of mind that comes with a fixed-rate loan. Many remember when interest rates shot up to stratospheric levels almost overnight.

If you do contract for an ARM loan, study the terms carefully. Take special note of the index used to determine the ups and downs of your interest rate. Some are more conservative than others in reacting to economic pressures. And consider the caps on annual increases in rates, and the lifetime interest rate cap.

Also note whether your ARM loan will allow you to convert it to a fixed-rate loan. In selecting a mortgage loan, there's a lot more to consider than just the interest rate.

Many borrowers who only consider a fixed-rate mortgage are taking a 15-year loan instead of the traditional 30-year term, Mr. Stone said.

"In some cases, homeowners are refinancing their 30-year loan with a new 15-year loan and making about the same monthly payment. This, of course, is possible because of the lower interest rate of the new loan," he said.

Other borrowers, who like the idea of a shorter term, feel it's best to take a new 30-year, fixed-rate loan and make extra payments to reduce the principal each month. They can achieve the same objective, but can defer the extra payments if they experience a financial squeeze. They are not obligated to make a higher payment each month, as they would be with a 15-year mortgage.

A particularly popular mortgage loan is one that is basically an ARM loan that can be converted to a fixed-rate loan any time between the 13th and 60th month in its term, said Cliff Norton, owner of Norton Mortgage Corp., a mortgage brokerage firm.

"This loan gives the borrower a lot of flexibility," Mr. Norton said. "He can take advantage of today's very low ARM interest rate but have the opportunity to quickly convert to a fixed-rate loan when he feels it's to his advantage to do so."

Mr. Stone said the current home-sale market provides a rare "window of opportunity" for buyers. "Considering today's low mortgage interest rates and low home prices [compared with a year or two ago], today's buyers have the best of both worlds," he said.

*

R Q: Does the concept of trading homes during vacations work?

A: The idea of "exchanging residency in my house for residency in yours during a vacation" seems to be quite workable in most cases. Since I discussed the concept in a recent column, I've received calls from readers asking for more details and relating their experiences.

One was from Frank Haines, host of a radio talk program. We arranged an on-air discussion of the subject.

Several callers added perspectives. For example, Bob called to talk about his positive experiences in trading homes. In one case, he said, the exchange was with a couple in England who have since become good friends. Neighbors of the English couple also became friends.

Allan called to ask whether a portion of a house could be used in a vacation exchange. The answer is yes. Simply describe to your prospective exchange partner precisely what type of accommodation you can offer. If all is acceptable to both parties, go for it.

Questions may be used in future columns; personal responses should not be expected. Send inquiries to James M. Woodard, Copley News Service, P.O. Box 190, San Diego, Calif. 92112-0190.

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