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30-Year Mortgages at 5% a Real Steal ; Long-Term Rates Below Arms Called 'Unnatural Condition'

Posted on: Thursday, 30 June 2005, 09:00 CDT

Homeowners now can lock in 30-year fixed-rate mortgages that often are less expensive than most short-term adjustable-rate mortgages.

This peculiar situation hasn't been seen in the market for a decade.

"It's an unnatural condition," said Lou Barnes, principal of Boulder West Financial Services.

It could be signaling a worldwide economic slowdown tied to a variety of factors, including rising oil prices, Barnes and other experts warn.

A customer with excellent credit who's willing to pay a one- point fee could lock in a 30-year, fixed-rate loan at 5 percent Wednesday, said Doug Anderson, president of Key Mortgage Corp.

A typical adjustable-rate mortgage, known as an ARM, locked in for five or 10 years at a fixed rate would cost 5.125 percent, he said.

"It's an amazing thing," Anderson said. "It blows me away. I try to explain it to my clients, but I think a lot of them don't think it's real."

ARMs theoretically should be lower than long-term fixed-rate loans because with ARMs the borrower shares the risk of rising rates with the lender.

Barnes said that the last time long-term rates were lower than short-term ARMs was in early 1995. The situation quickly reversed itself, however, while this time it may not, he said.

The Mortgage Bankers Association on Wednesday released a national report that said the average 30-year, fixed-rate mortgage fell 16 basis points, to 5.47 percent, from a week earlier.

The Federal Reserve Board is widely expected to raise its short- term rates by a quarter-point to 3.25 percent today. That increase, in turn, will cause the prime rate and many ARMs and home equity loans to rise.

The central bank, which has raised its benchmark by quarter- point increments at every one of its policy meetings since last June, last month reiterated its plan to make future increases at a "measured" pace.

The Fed increase will mean that about $2 trillion in adjustable- rate mortgage and home equity lines of credit nationally will be adjusting upward, increasing monthly payments, Barnes said.

He said the "saving grace" is that even with the bump up, rates will remain relatively low by historical standards.

Still, in the Denver area, rising rates are expected to drive up home foreclosures.

In the first half of the year, there were an estimated 7,169 real estate foreclosures in the metro area, about 14.5 percent more than the 6,264 in the first half of 2004, according to a survey of county public trustees' offices. Last year was the second-worst on record for foreclosures.

Anderson said that "option" ARMs, which allow home buyers to decide whether they want to pay interest only on a loan or pay down the principal, are especially dangerous for first-time home buyers and are contributing to rising foreclosures.

He said they are similar to paying a minimum balance on a credit card, only to be slapped with a higher payment in the future.

"Higher interest rates act as a kind of unwanted tax," noted a recent report by New Jersey-based HSH Associates, which tracks mortgages across the country.

"Most Americans hold some form of variable-rate debt, whether unsecured credit card, home equity line of credit or first mortgage, and the coming increase in their monthly payments will likely also serve to temper economic growth somewhat in the months ahead."

Barnes said 30-year loans with no origination or discount points have been hovering between 5.5 percent and 5.625 percent.

Most ARMs, by contrast, after discount fees and the super-low teaser rates are over, typically are at least 5.625 percent. And those adjustable rates will only go up, he said.

Tyler S. Carraway, a mortgage consultant with Aspen Funding Corp., said it's difficult to directly compare ARMs and fixed-rate loans because there are so many variables.

"I do think (Barnes) is generally on track," Carraway said. "You used to see such a huge difference between fixed rates and ARMs. The margin between the two is no longer as great."

Source: Rocky Mountain News

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