More buyers rush to open ARMs

August 14, 1994|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

It's as inevitable as the rise and fall of mortgage rates. They spike up, economists say, and fixed-rate loans go out of vogue as quickly as adjustable-rate loans come back.

With rates rising, the pattern is emerging again -- but this time with a twist.

Today, lenders are offering more flexible terms than in the past, making some ARMs less risky. The changes, along with the rising rates, are helping to draw borrowers in droves.

"I haven't written a fixed-rate loan since February," said David Meltzer of CTX Mortgage in Owings Mills. "More and more buyers have cash problems, job stability problems, credit problems, and we have to shoehorn them in. They come to me and say, 'I want this house. How do I get into it?' "

For instance, while interest rates on most conventional ARMs can increase 2 percent a year and 6 percent over the life of the loan, some loans -- usually with a slightly higher starting rate -- now offer 1 percent annual caps and 5 percent lifetime caps.

Lenders also are offering flexibility in the period -- one, three, five, seven or 10 years -- in which the introductory rate applies before converting to an adjustable rate.

"The adjustment can be more stable for someone who does not feel comfortable with an ARM but wants a better rate," Mr. Meltzer said.

ARMs tend to become popular as rates rise because starting rates aregenerally lower than fixed-rate mortgages -- making buying, especially for first-timers, easier. Of course, borrowers risk higher rates in the future, but for some buyers with cash

shortages or poor credit, lower-rate loans offer the only hope of qualifying for a mortgage.

Almost 28 percent of homebuyers chose an ARM in the second quarter, according to a Mortgage Bankers Association survey of national and regional lenders. That was the most since 1990, and up from 18.5 percent in the first three months of this year. Nearly all companies surveyed had expanded ARM products to meet heightened demand.

And the percentage of borrowers who refinanced from 30-year, fixed-rate mortgages -- which rose in the second quarter to 14 percent from 6 percent -- was the highest since 1988, according to the Federal National Mortgage Association or Freddie Mac.

"Borrowers need something to be attracted to," said Vassilis Lekkas,senior economist at Freddie Mac. "They've seen interest rates go up, and mortgage brokers are offering great deals on ARMS, relative to what they'd offered in the past. Many lenders had had a higher volume because of refinancing. By offering attractive ARMs, they can retain volume."

Rates on 30-year, fixed mortgages have climbed from 25-year lows of below 7 percent last October to close to 9 percent.

ARMs now account for about one-third of all loans originated at GMAC Mortgage in Severna Park, according to Richard P. Cermak, the sales manager. The company has begun offering ARMs tied to the cost of funds for banks in a Federal Reserve district that covers California and Nevada, where rates have remained relatively stable, Mr. Cermak said. Such programs -- unlike most which are tied to the one-year Treasury bill -- are more difficult to find but are available, he said.

At Prosperity Mortgage's Baltimore branch, ARMs and the similar, but less risky, flex premium-priced loans have increased about 25 percent since the beginning of the year and now account for nearly 70 percent of all loans originated.

Adjustable-rate mortgages are not for everyone, Mr. Lekkas said. Borrowers must be aware that the low rate they start with may increase.

"If someone moves into a house or refinances a loan and doesn't expect to stay more than five years, then an ARM is a great product," he said. "It's not a good product for somebody who does not like risk. It's almost certain that next year's rate will go up by 2 percent, the usual limit."

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