Mortgage rates rise quickly, pass 8.6%

Lenders expecting new increase by Fed

May 23, 2000|By Robert Nusgart | Robert Nusgart,SUN STAFF

If Jon and Susan Hartman had procrastinated a few weeks more, they might have been packing in their dreams, instead of packing for their new home."It was horrible to watch," Susan Hartman said. "Each time the interest rates go up, you can afford less house."

Luckily, last month the Hartmans found a home in Ulmstead Estates, just off the Magothy River in Anne Arundel County. They had counted on a fixed-rate mortgage, but with rates inching closer to 9 percent, a lower rate adjustable rate mortgage made more sense.

With lenders beginning to build in for a potential Federal Reserve Board rate increase late next month, Baltimore-area home buyers shouldn't be surprised to see 30-year, fixed-rate mortgages climbing above 9 percent - the highest since spring 1995.

At Susquehanna Mortgage Corp., where the Hartmans got their loan, the 30-year, fixed-rate mortgage for a conventional no-point loan was at 8.75 percent yesterday, down slightly from 8.875 percent Friday, according to Greg Pappas, vice president for secondary marketing. In May 1999, the rate was 7.5 percent.

On a 30-year, $200,000 loan at 8.75 percent, the principal and interest are $1,573 a month - $175 more than at 7.5 percent.

At 9 percent, the monthly mortgage rises to $1,609. In addition, the borrower will pay $75,894 more in interest over the life of the loan.

Last week, the average 30-year fixed-rate mortgage in the Baltimore area was 8.66 percent, according to HSH Associates, a New Jersey firm that tracks and analyzes mortgage rates.

The last time it was that high was 8.67 percent on March 3, 1995, and the last time rates passed 9 percent was Feb. 17, 1995, when they were 9.06 percent.

Nationally, the latest Freddie Mac mortgage survey averaged 8.64 percent for a 30-year, fixed-rate loan - the highest since Feb. 24, 1995.

"The double whammy of rising [home] prices and rising interest rates should theoretically help to cool the market some," said Keith Gumbinger, vice president of HSH Associates.

But despite six short-term interest rate increases by the Fed since June to slow the economy, many lenders say they are still enjoying brisk business from home sales.

However, according to Pappas, the Fed's half-point increase last week should begin to chill the spring market.

"It is going to slow some people up because now they can't afford as much of a house," Pappas said. "I think people [will say], `Before we make this move, let's wait until the rates come down [so] we can afford a bigger house.'"

The rise in rates has a significant effect on the amount of money a buyer can borrow.

A house hunter who was prequalified for a $200,000 loan at 8.5 percent last month would be able to borrow only $191,123 today at 9 percent to maintain the same monthly payment. The difference would have to be made up with either a bigger down payment or a reduction in the purchase price of the home.

When the Hartmans were qualified by Susquehanna Mortgage last month, the rate for a 30-year, fixed-rate jumbo loan - those amounts over $252,700 - was 8.75 percent. The same loan has risen to 9.25 percent.

Instead, to keep their monthly payments down, the Hartmans chose an adjustable rate mortgage that remains constant at 7.625 percent for the first five years before adjusting to market conditions in the sixth year of the loan.

By going that route they will shave $252 off their monthly mortgage payment and will save more than $15,000 over the first five years of the loan.

Nevertheless, the rise in rates has slowly wiped the smiles off some borrowers' faces.

"Customers aren't happy," said Neil Sweren, president of AllyMac Mortgage in Owings Mills.

"My guess is that rates are going to creep up ... but we are starting to see more people lean toward mid-term ARMs," said Sweren, referring to mortgages that offer rates lower than a fixed-rate mortgage for three, five, seven or even 10 years before adjusting.

And, Gumbinger said, given the history of mortgage rate roller coasters, a fixed-rate mortgage at 9 percent is "not a terrible deal."

"They are just not as good of a deal as they have been," he said.

Gumbinger said that in the past 20 years, "significant" refinance opportunities arise "about once every five to six years."

Said Sweren: "I think people understand, more now than they did 10 years ago, that an interest rate is not permanent. If you end up at 9 percent and rates go up to 12, you are going to think that 9 is pretty good. And if it goes down to 6, you are going to refinance.

"If it goes up to 15 percent, I'll be selling apples on the street corner."

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