Better times, higher rates

Economic recovery expected to raise cost of borrowing

30-year loan at 7.14%

Mortgage experts foresee upward trend into fall

March 24, 2002|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

The good news is that the economic recovery seems to be under way.

The bad news is that what's good for the economy isn't good for consumers shopping for mortgage rates.

If homebuyers haven't already noticed, mortgage rates are climbing, and the consensus is that they are likely to continue their upward trend into the spring, summer and fall.

In its weekly survey, Freddie Mac, the federally charted mortgage company that supplies funds to lenders by purchasing mortgages, reported that the average 30-year, fixed-rate mortgage increased to 7.14 percent, up from 7.08 percent the previous week and 6.87 percent the week ending March 6. Friday's average was the highest since Jan. 3, when rates also hit 7.14 percent.

The upward creep is approximately three-quarters of a percentage point more than where the survey was Nov. 8, when Freddie Mac reported its lowest average ever at 6.45 percent.

In real dollars, that means a borrower applying for a $200,000 mortgage at the beginning of November would have a monthly principal and interest payment of $1,257. Now, that same mortgage would cost the borrower $1,349, a difference of $92 each month.

As for the Baltimore metropolitan area, the average 30-year fixed-rate mortgage rose to 7.18 percent, according to HSH Associates, a New Jersey firm that tracks and analyzes mortgages.

"The economy is doing pretty well. And when the economy is recovering, you tend to see interest rates go up," said Robert Van Order, chief international economist at Freddie Mac. "And that seems to be what is going on now."

"Pain and suffering on the economy equals good interest rates," said Gene M. Lugat, senior vice president of AccuBanc Mortgage and president of the Maryland Mortgage Bankers Association. "Unfortunately, it is the double-edged sword."

Lugat quoted a rate of 7.25 percent with no points (a point is equal to 1 percent of the loan amount) while emphasizing rates are still in "a very favorable environment."

"We are not at the bottom of where we were last November or in 1998 ... but we are still in a relatively very cost-effective market to borrow and to finance a 30-year mortgage," Lugat said. "But from what we can see today, that 7.5 to 8 percent range is a target that I think you will see the market land on by mid-summer."

Van Order said he didn't think rates would go as high as 8 percent; rather, "the best bet is that they will stay in the low 7 [percent range] possibly mid-7 [percent range], and from a market point of view those are still low by historical standards."

Last week, the rate-setting committee of the Federal Reserve Board left the overnight lending rate unchanged, but changed its bias to a neutral stand, saying the economy is expanding. Lenders saw that as a signal that in the coming months the Fed will start increasing short-term rates.

Although the Federal Reserve's action affects short-term rates and has no direct effect on long-term mortgages, it does prompt lenders to begin moving their rates higher.

HSH Vice President Keith Gumbinger said his company expects mortgage rates to be in the 7.5 percent range by summer and then increase by fall to 7.75 percent "if the current trend in the economy continues [and] we post modest growth.

"The economy does appear to be getting its feet back under it, so the likelihood is higher interest rates later on in the year, and it is probably safe to say that the 35-year lows that came last fall, and stayed for only a short time, are gone until the next recession," Gumbinger said.

Although rates are climbing, Lugat and Gumbinger see a generation of borrowers who are "spoiled" -- as Gumbinger puts it -- by low mortgage rates.

"Even looking back to the early 1990s to where we are now, consumers have become accustomed generally to declining interest rates," Gumbinger said. "Consumers have become spoiled by interest rates in the low-to-mid-7 percent range and even more so by periods of interest rates being in the 6 percent range three periods over the last 10 years."

Said Lugat: "We've desensitized interest rates to the degree that they've been down at very low levels for the last seven- or eight-year cycle." But as fixed-rate mortgages climb, lenders are prepared to see more consumers select adjustable rate mortgage products.

The "5/1" and "7/1" adjustable rate mortgages are fixed for the first five or seven years and then begin adjusting to the market rate on a yearly basis. The advantage for the consumer is those mortgages offer rates that typically lock in for the initial term at a quarter or a half of a percentage point lower than the 30-year fixed-rate mortgage.

"Any time we start seeing the market moving up in this direction, those midlevel ARMs become a product in demand," Lugat said.

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