Fixed Rate Mortgages

This is not your parents' mortgage market. A generation ago, banks took on deposits and lent that money to homebuyers who took out 30-year, fixed-rate mortgages. That changed when Wall Street got involved in recent decades. Investment banks provided capital to mortgage companies so they could make the loans, and then bought the loans and bundled them into securities that are sold to investors. Through the magic of "securitization," the broker, lender and investment bank essentially become fee-collecting middlemen between the borrower and investor.

With mortgage rates on the rise and the volume of refinancing decreasing, the prevalence of 15-year fixed-rate mortgages remained constant last quarter compared with the first quarter of 1999.Freddie Mac reported that its quarterly refinancing study found the popularity of the 15-year term was unchanged from the first quarter for borrowers holding 30-year mortgages, while it decreased for borrowers with 15- and 20-year terms.According to the study, 31 percent of borrowers refinancing 30-year mortgages decided to refinance into 15-year loans, while 59 percent stayed with the 30-year, both unchanged from the first quarter of 1999.

Which comes first: finding the house or finding the mortgage?Both can be daunting, especially when you are engaging in one of the most active real estate markets in a generation. But if you listen to the experts, before getting emotionally wrapped up in finding the home of your dreams, finding the mortgage and how much you can afford makes the most sense."The worst time to go shopping for a mortgage is after you've signed the contract to buy the home," said Keith Gumbinger, vice president of HSH Associates Inc., a New Jersey company that tracks and analyzes mortgage rates nationwide.

Borrowers who choose to refinance existing 30-year fixed-rate mortgages are likely to stay with a 30-year loan, according to third-quarter statistics released by Freddie Mac.The study showed that 24 percent of borrowers who originally held a 30-year mortgage decided to switch to a 15-year fixed-rate mortgage. That figure is down from 30 percent in the second quarter. The majority of homeowners -- 65 percent -- refinanced into a 30-year product.Of borrowers refinancing 15-year fixed-rate mortgages, 25 percent decided to switch to a 30-year loan, while 70 percent refinanced into a 15-year loan.

THE COUNTRY'S largest source of home mortgage money -- Fannie Mae -- has come up with a new loan custom-tailored for people with good credit but very little cash.Dubbed the "Flexible 97," the new mortgage carries a minimum down payment of 3 percent, but allows all of that money to come from a gift or unsecured loan from a family member, or cash assistance from an employer or other sources.In most conventional low-down-payment programs, by contrast, at least 3 percent of the loan amount must come from the applicants' own cash resources.

One day an economic forecast is released that sparks fear that inflation is accelerating, which in turn sends the stock market zooming downward.Less than a week later, another set of government numbers are released that indicate inflation isn't as strong as we thought. Down go the fears and up goes the market.Ah, but those in the know are still wary of the Federal Reserve Board. Will it raise rates again when it meets in May or do nothing?What does it all mean to a consumer in the market for the best mortgage he or she can find?

One day an economic forecast is released that sparks fear that inflation is accelerating, which in turn sends the stock market zooming downward.Less than a week later, another set of government numbers are released that indicate inflation isn't as strong as we thought. Down go the fears and up goes the market.Ah, but those in the know are still wary of the Federal Reserve Board. Will it raise rates again when it meets in May or do nothing?What does it all mean to a consumer in the market for the best mortgage he or she can find?

A study issued last week by Freddie Mac shows a sharp third-quarter increase in the demand for 30-year fixed-rate mortgages -- and a clear move away from 15-year FRMs -- by people refinancing their loans.The study was based on mortgages for which the Federal Home Mortgage Corp. purchased both the original and refinancing loans obtained by homeowners. The change was linked to rising interest rates.The survey found 63 percent of those who refinanced 30-year fixed-rate mortgages chose to stay with 30-year loans, up from 53 percent in the second quarter.

In January of last year, when fixed-rate, 30-year mortgages were sitting above 9 percent nationally, the United States was up in ARMs.Adjustable-rate mortgages accounted for 59 percent of all conventional loans that month, according to the Federal Housing Finance Board (FHFB), the highest level since 1988. That came as no surprise to lenders, because ARMs could be had for 7 percent or lower.Since early 1995, however, interest rates have plummeted. Thirty-year fixed-rate conventional mortgages -- loans that aren't government-backed -- dropped below 7 percent recently, although they hiccuped back to 7.32 percent nationally last week, according to a survey by another government agency, Freddie Mac.Locally, the average 30-year fixed rate is 7.42 percent, according to HSH Associates of Butler, N.J., which surveys Baltimore-area lenders.

Homeowners who refinanced last year cut interest rates on 30-year mortgages by an average of 2.20 percent, the Federal Home Loan Insurance Corp. reported last week.More than two-thirds of all borrowers reduced their monthly payments, a survey of 740,000 Freddie Mac loans across the country showed.During 1986, the last major year of refinancing, homeowners reduced rates by an average of 2.60 percentage points.The latest survey showed 83 percent of borrowers refinancing 30-year mortgages ended up with lower payments, while 94 percent of homeowners refinancing into adjustable-rate mortgages wound up with lower payments -- both records.

Exotic mortgages, as well as some lenders, are a thing of the past. But the need to borrow to buy a home is very much present. The lending landscape keeps changing fast, economists, mortgage brokers and lenders say, so homeowners and potential buyers need to stay current. "I think the choices consumers will have will be much more constrained, as will the number of lenders," said economist Anirban Basu, chairman and CEO of the Baltimore-based Sage Policy Group. Fixed-rate mortgages, the predictable 15- or 30-year kind your parents had, are making a comeback, with adjustable-rate loans getting a smaller share of the market, Basu said.

This is not your parents' mortgage market. A generation ago, banks took on deposits and lent that money to homebuyers who took out 30-year, fixed-rate mortgages. That changed when Wall Street got involved in recent decades. Investment banks provided capital to mortgage companies so they could make the loans, and then bought the loans and bundled them into securities that are sold to investors. Through the magic of "securitization," the broker, lender and investment bank essentially become fee-collecting middlemen between the borrower and investor.

Two years ago, Andrea Eaton had just finished studying financial planning at Texas Tech University and was tempted to buy a home as she started her first job in Minneapolis. After college apartment living, the last thing she wanted to do was to rent again. The apartments she found were discouraging - cramped and drab for the price. So she considered buying a townhouse, and a mortgage broker assured her she could handle the payments. By the time she heard what he had in mind, however, she dropped the house idea and was satisfied paying rent.

Homeowners who put off refinancing got a piece of welcome news this week: Fixed-rate mortgages fell sharply to their lowest levels since late April. But now might not be the time to delay again. "With windows of opportunity, you never know how long they are going to stay open," said Joel Naroff, of Naroff Economic Advisors in Holland, Pa. Naroff and other economists agree that in the long run, fixed-rate mortgages are now headed up. But because the economy is still recovering, there are likely to be swings up and down, touched off by strong or weak economic reports.

One-year adjustable-rate home mortgages rose slightly last week, responding to Wednesday's decision by the Federal Reserve Board to raise a key short-term interest rate for the first time in four years. Fixed-rate mortgages - the most popular kind of home loans - declined. The Fed - which raised the federal funds rate by a quarter percentage point to 1.25 percent - is expected to keep inching rates higher for the rest of the year, a move to limit inflation by raising the cost of borrowing money.

WASHINGTON - Mortgage rates around the country fell last week for the first time since the middle of last month. The average interest rate on 30-year fixed-rate mortgages dropped to 6.04 percent for the week ending Friday, Freddie Mac reported Thursday in its weekly nationwide survey. That was down from 6.19 percent the previous week. Last week's rates marked the first time rates on 30-year, 15-year and one-year adjustable-rate mortgages fell since the week ending Nov. 15. At that time, rates on 30-year mortgages dropped to 5.94 percent, the lowest level since the mortgage giant began tracking them in 1971.

Volatility of markets blamed as mortgage rates edge higher Mortgage rates around the country edged up last week as investors tried to decipher mixed economic reports and other information about where the economy is heading. The average interest rate on 30-year fixed-rate mortgages moved up to 6.03 percent for the week ending Nov. 22, after dropping to a new low the week before, Freddie Mac reported Thursday in its nationwide survey. Last week's rate of 5.94 percent was the lowest since the mortgage giant began tracking 30-year mortgage rates in 1971.

The adjustable-rate mortgage market slid to a three-year low in popularity last year as homebuyers preferred fixed-rate mortgages with interest rates at 30-year lows, according to an annual survey by Freddie Mac. Adjustable-rate mortgages grabbed only 12 percent of the mortgage market in 2001, down from 21 percent in 2000, according to the survey. The 12 percent is the lowest share since 1998's 11 percent share, which was an all-time low. ARMs were first offered in the early 1980s. Homebuyers did not find the spread between adjustable-rate mortgages and fixed-rate mortgages advantageous since, according to Freddie Mac, the initial rate for a one-year ARM was 5.27 percent compared with fixed rates that hovered between 6.5 percent and 7 percent by the end of last year.

For Ignatius "Iggy" Stefanski, the health of the housing industry can be measured by how many holes he digs. And last week, he dug a lot of holes. "We are the best barometer in the world, because we service everybody," he said yesterday from his booth at the Greater Baltimore Board of Realtors annual convention. Stefanski, president of Odenton-based LJS & Associates, installs and removes thousands of heavy 2-by-4 "For sale" signs for 485 real estate companies in seven states, including Long & Foster Real Estate Inc. and O'Conor, Piper & Flynn ERA. After the terrorist attacks in New York and Washington, he admitted, he was "scared to death" that his business would plummet, and it did for four days after Sept.

IN THE wake of the Federal Reserve's latest interest rate move, the mortgage market has an unlikely new wrinkle that you shouldn't ignore. For the first time in many months, some of the most attractive deals for homebuyers and those refinancing can be found in adjustable-rate loans rather than fixed-rate mortgages. In the days immediately after the Fed's half a percentage point rate cut, fixed-rate 30-year home loans actually rose slightly in price while adjustable-rate mortgages declined.