Do You Feel Lucky?

Mortgages: As interest rates continue to fall, borrowers are torn between the safety of a fixed-rate mortgage and the more risky adjustable rate.

July 07, 2002|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

Well, here we go again.

If you happened to miss the refinance opportunities of 1993, 1998 and 2001, the mortgage markets are giving you -- as well as borrowers looking to purchase a home -- another opportunity.

Mortgage rates are bottoming out once again. But not only is the old war horse -- the 30-year, fixed-rate mortgage -- hovering around and even dipping below 6.5 percent, but those adjustable rate mortgages are becoming so tantalizingly low that people in fixed rates might just want to take a look to see whether they can better their financial circumstances.

So what should a borrower do? It depends on circumstances, objectives and how lucky you feel.

Last week, the Freddie Mac 30-year fixed-rate average stood at 6.57 percent, up slightly from the previous week's 6.55 percent, which was the low for the year. The 15-year rate was at 6.03 percent, and the one-year adjustable rate mortgage -- better known as an ARM -- was at 4.58 percent, the lowest since March 11, 1994, when it averaged 4.51 percent.

In Baltimore, the 30-year average last week was 6.59 percent, the lowest ever recorded for the area, according to HSH Associates, a New Jersey-based firm that tracks and analyzes mortgages nationwide. The previous low was in the aftermath of Sept. 11, when rates dipped to 6.66 percent for the week ending Nov. 9.

The 15-year average mortgage rate last week in Baltimore stood at 6.04 percent and the one-year ARM dropped to 4.65 percent, the lowest also since March 1994, according to HSH Associates.

"We are in the sixes now; can we get to 6? I suppose we can," said Alan R. Ingraham, regional vice president for First Horizon Home Loans and president of the Greater Baltimore Board of Realtors. "I think right now there is a greater chance we're going to see 6 in the near term than the chance that we are going to see 7.5. And there is no question that this is going to continue to fuel activity in the marketplace."

When was the last time rates were this good? How about when Gomer Pyle was on prime-time TV?

Shazzam!

"If our forecast holds true, the 30-year, fixed-rate mortgage will have averaged 6.8 percent this year," said Frank Nothaft, chief economist for Freddie Mac, the mortgage giant that supplies funds to lenders by purchasing mortgages. "The last time when the mortgage rate was below 6.8 as an annual average was 1967, 35 years ago. It is a phenomenal time."

One of the hottest products on the market is a government-insured, one-year FHA adjustable-rate mortgage.

"I sell this all the time to young couples and first-time homebuyers," said Bill Heffernan, president of First Home Mortgage in Lutherville, who added that those two groups are typically out of the starter home within four or five years.

An adjustable-rate mortgage is just that -- it adjusts, either up or down, after a certain time period, and it has caps on how much the interest rate can adjust.

Some lenders have been offering the FHA one-year adjustable with a beginning rate of 4.5 percent with the borrower paying one point. A point is 1 percent of the borrowed amount. If you borrow $200,000, that means you'll pay the lender $2,000. A borrower has the option to get a higher interest rate and avoid paying points.

The principal and interest on a $200,000 mortgage -- the FHA maximum loan amount in Baltimore is $261,609 -- would be $1,013 at the 4.5 percent rate. Comparatively, for a fixed 6.5 percent loan, the principal and interest would be $1,264. The borrower would be saving $251 a month.

With an FHA loan, however, there is a funding fee of 1.5 percent of the borrowed amount that can be rolled into the total mortgage, and there is a monthly mortgage insurance fee that is one-half of a percent of the loan amount.

What makes the FHA adjustable additionally attractive is that it can only adjust a maximum of 1 percent on the anniversary of the loan with a lifetime cap of 5 percent. Nongovernment ARMs typically carry a 2 percent annual maximum adjustment and a 6 percent lifetime cap.

Simply then, the worst-case scenario is that a borrower's FHA mortgage could eventually climb to no higher than 9.5 percent. And most lenders would agree that if that mortgage got to 9.5 percent, most conventional mortgages would be in double-digit land.

True, the 30-year, 15-year and one-year mortgage products are enticing, but lenders are also offering other "hybrid" ARMs that strike a balance between interest rate and risk.

The "hybrid" products are presented as 3/1, 5/1 or 7/1 ARMs. Instead of adjusting annually, they hold the starting interest rate -- which is lower than a 30-year rate -- for either three, five or seven years before turning into an annual ARM.

Ingraham at First Horizon has been refinancing clients into a 5/1 ARM that has a starting rate of 5.75 percent. That means the monthly principal and interest payment stays at $1,167 for the first 60 months on a $200,000 loan. The savings in those first five years amounts to $5,820 compared with a traditional 6.5 percent fixed rate.

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