Rising mortgage rates are making gamblers out of some home loan borrowers.
With rates on 30-year, fixed mortgages stretching toward the 9 percent mark, variable-rate loans and their hybrids have begun to look more attractive to consumers -- despite their risks.
Adjustable loans offer borrowers less security than fixed loans, because rates can rise after a period of time.
Early this year, borrowers could get 30-year, fixed loans with interest in the 7 percent range. But rates have risen, averaging 8.30 percent nationally last week. Borrowers have turned to alternative loan products with lower starting rates to keep from being priced out of the housing market, mortgage lenders and analysts say.
Some borrowers believe the benefits outweigh the risks.
Howard County homeowner Eugene Klee recently refinanced the mortgage on his four-bedroom Colonial in Laurel, switching his rate of 8.75 percent to a starting rate of just below 7 percent on a one-year adjustable loan. He is betting rates will remain at current levels or drop lower.
"I think rates will be lower than they are today, so I saw no reason to lock into a 30-year fixed rate at 8 percent," said Klee, a retired director of data processing for Montgomery County schools.
Economists at the Mortgage Bankers Association predict ARMs will have made up 16 percent of loan originations nationally in the first quarter of the year, before jumping to a quarter of all originations in April, May and June, then increasing to 28 percent for the remaining two quarters.
"Mortgage rates have risen almost 1.25 percent since January, and that should prompt a lot of activity in this area," said David Lereah, chief economist with the Mortgage Bankers. "People go right to ARMs when interest rates rise. Fixed rates are less affordable and they want to get into a home.
"There's always a risk. If [short-term] rates go up, usually people with ARMs will lose. If rates go down, they win, and if rates stay the same, they win."
But the widening spread between rates on 30-year loans and 1-year ARMs has tempted many borrowers.
"Rates are at the peak of the cycle," said Keith Gumbinger, a mortgage analyst with HSH Associates, which tracks local mortgage rates. "The spread is 2 3/8 on average, enough to provide some inducement for consumers to at least consider them."
For borrowers who choose a variable loan over a fixed loan, the initial savings can be substantial, said Veronica M. Tobin, a mortgage banker with MNC Mortgage Corp. in Lutherville. Nationally, rates on one-year adjustable loans averaged 5.93 percent, last week, according to The Federal Home Loan Mortgage Corp., known as Freddie Mac.
A monthly payment on a $100,000 mortgage at 6 percent, including principal, interest, taxes and insurance, would be $772, compared with $939 at a rate of 8.5 percent, Tobin said.
"New homeowners or first-time homebuyers can use adjustable loans to give them more buying power early on," Tobin said. "With all the information out there, the consumer is much more informed and more apt to take a chance on an adjustable, as long as you give them a worst-case scenario."
One-year adjustable loans, tied to Treasury bills, can increase by up to one or two percentage points per year after the first year, with a cap of either five points or six points over the life of the loan. Other, less risky adjustable-loan products include those that can adjust after three, five, seven or 10 years.
At Baltimore American Mortgage Corp., based in Hanover, adjustable loans carry slightly higher than average rates, but borrowers pay no points or closing costs. The incentive has boosted the lender's share of adjustables, which now account for most of the loans originated, said Don Ordakowski, president.
"When the fixed rates are below 8 percent, for the majority of borrowers, it becomes a fixed-rate market," Ordakowski said. "When they get higher and toward 9 percent, the majority of the business switches to adjustable."
A borrower's situation often determines when to use adjustable loans, lenders said. Such loans often work well for recent college graduates who expect salary increases, which would allow them to handle higher payments if rates edge up. Other candidates include borrowers buying starter homes who expect to move to a larger house in three to five years or others who have no plans to stay in a house for an extended period.
But 30-year fixed-rate mortgages remain the loan of choice for most people. During the first three months of 1996, adjustable loans accounted for only 13 percent of conventional loans closed in Maryland, according to the Federal Housing Finance Board in Washington.
"Those who can qualify seem to be going for the fixed," said Catherine Janson, a loan officer for Signet Mortgage Corp. in Columbia. "But we are finding more people who several months ago would have been able to qualify at fixed rates no longer can because of an increase in rates, and they are definitely taking the ARMs."
Others who find the adjustable loans to be good bets include the self-employed or those who get bonuses in addition to a regular salary, Janson said. Borrowers can apply those bonuses to their balance so that rate adjustments are computed on the new balance, keeping monthly payments down.
Pub Date: 6/23/96