6.5% rate isn't likely

Experts believe mortgages are bottoming out

7% seems to be threshold

Many people wait too long, only to see them increase

September 09, 2001|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

If you were gambling that 30-year fixed-rate mortgages were heading toward the 6.5 percent mark, you may not want to bet the house on it happening just yet.

Although mortgages in the Baltimore metropolitan area have slowly declined to some of their lowest levels since February 1999, mortgage industry experts are warning consumers that rates may be bottoming out and ready to move higher.

The average 30-year fixed-rate mortgage in the Baltimore area was 7.01 percent last week, up from 6.95 percent the previous week, according to HSH Associates Inc., a New Jersey company that tracks and analyzes mortgages.

The prior low point for the year was 6.98 percent at the end of March. The last time mortgages were below 7 percent was the week of Feb. 26, 1999, when the 30-year mark stood at 6.85 percent.

In its weekly mortgage survey, Freddie Mac, the federally chartered organization that supplies funds to lenders by purchasing mortgages, reported that its 30-year average dropped to 6.89 percent, matching its lowest mark of the year.

"We are dancing along the bottom, but that's not to say we might not see a little dive back down in rates again," said a cautious Keith Gumbinger, vice president of HSH Associates.

"The downdraft in recent weeks of interest rates is of the kind that makes us nervous for a snapback," Gum- binger added. "This bounce off the bottom for rates will definitely be real. If you have been hedging that rates are going to go lower and go lower, you are going to be very unhappy about it."

Gloomy economic reports in recent weeks had Wall Street investors moving their money out of stocks and into the bond market, where mortgages take their cue, particularly from the 10-year Treasury note.

That flight caused bond prices to go up, pushing yields down, hence lower mortgage rates.

The mortgage industry looks to the 10-year bond as a better barometer than the 30-year Treasury bond, since homeowners rarely hold the same mortgage for 30 years and generally refinance within the first 10 years.

However, a brighter manufacturing report last week, suggesting activity might be on the rise after a year-long decline, gave investors reason to reassess their position, driving down the bond market.

"It doesn't necessarily take great news in order to make rates go up," Gumbinger said. "We're at the point where all it takes is not-quite-as-bad-as-expected-news to make rates go up because they have drifted down in the last weeks."

Al Ingraham, vice president of First Horizon Homes Loans, MNC Division, agreed that "in this industry, rates come down very slowly, and when they go up, they go up rather quickly."

But no one is predicting that rates are going to spike tremendously. The Mortgage Bankers Association of America is predicting that 30-year rates will continue to hover around 7 percent through the second quarter of 2002.

"The recent fall [in rates] is probably over," Gumbinger said.

The HSH national survey noted: "Despite all the dire news this year, and all the `we're in a recession and the world is coming to an end' since the beginning of the year, interest rates have run in the range of about 7.4 percent to a low of 7.03 last week."

"There is a magic threshold of 7 percent and no points on a 30-year conventional, fixed product, and we are hard pressed to get much below that," Ingraham said. "Could we peak below it for a short period of time? Certainly.

"At the same time I don't see any particular reason why rates should be popping up dramatically, either. They show a little volatility from day to day, but there is nothing longer term in any of the markets that we see that would indicate we are going to see anything above a 7.5 percent in the next year or so."

The challenge for the consumer right now, Gumbinger said, is "not to be greedy."

"People tend to obviously want to get the best rate they can, and waiting and waiting just doesn't work," said Kevin Michno, senior vice president of Mercantile Mortgage Corp. "They may be happy with 6.75, but they are hoping to get 6.5, 6 5/8 ... in the scheme of things, in the short term, that really doesn't make a whole lot of difference in your payment."

If a borrower takes out a $150,000 mortgage at 7 percent, the monthly principal and interest is $997. That same loan at the psychologically better 6 7/8 percent means a principal and interest payment of $985, a difference of $12 a month.

The question lenders present to consumers remains: Is saving $12 a month worth the potential risk of rates possibly rising versus waiting for a small step down.

"What you have to get comfortable with is the payment," Ingraham said. "People seem to have an obsession with the interest rate. Focus on the amount of the payment and are you comfortable with that, not with what the rate is."

But for those consumers who are refinancing existing mortgages, and for those obtaining a new mortgage for a home purchase, the prospect of getting a no-point rate near 6.5 percent may have become much more difficult.

"The boat is probably getting to leave the dock if nothing else," said HSH's Gumbinger. "I don't know if you might have missed it, but you might have to jump over some open water to get there."

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