Rising Loan Rates Stun Home Buyers : Increases Frustrating to Persons Shopping for Mortgages, Refinancing
Suzanne Densley, a 30-year-old computer technician, says her plans to buy her first home have “been blown right out of the water.”
Densley’s preliminary discussions with lenders less than two months ago indicated that she could get a 9 1/2% loan for about $90,000. With a down payment of about $15,000, she figured she could buy a condominium in Sherman Oaks or perhaps even a small house in nearby Reseda or Panorama City.
“But all of a sudden, interest rates went up,” Densley says. “Now, the best rate I can get is 10 3/4%, and there’s no way I can qualify for a loan.”
Even if she could find a lender willing to finance a purchase, Densley adds, she might not be able to afford the extra $80 in monthly payments.
Setback for Borrowers
Across the nation, buyers like Densley have been dealt a serious setback by the sudden increase in fixed-mortgage rates. Fixed rates at most lending institutions have jumped from as low as 8 3/4% in March to as high as 11% today.
Although most lenders have dropped their rates back below 11% over the past several days, few financial experts say home buyers will once again see the 9% rates offered by most lenders earlier this year.
And although most predict rates will ease back to around 10%, stiff increases in home prices could easily wipe out any interest savings brought on by lower rates.
The increase is bad news for more than 1 million Americans who are shopping for a new home in this, the peak home-buying season. It has also sent a large portion of another million or so borrowers already in escrow scrambling for a way to keep their deals together.
Many of them began shopping for mortgages when fixed rates were 9% and below, and now might have to accept a rate as much as two percentage points higher.
Adjustable-Rate Mortgages
Buyers and refinancers who find their deals threatened by the recent rate increases should consider choosing an adjustable-rate mortgage (ARM) instead, experts say.
Initial rates on adjustables are still averaging about 7 1/2%, little changed from where they were at the bottom of the interest-rate cycle earlier this year.
Since most adjustables can’t be raised more than five percentage points over the life of the loan, an ARM with an introductory rate of 7 1/2% won’t go any higher than 12 1/2%--not much higher than the fixed rates currently being offered by most lenders.
“If you can get an adjustable with a rate that will never go above 12% or so, that’s a pretty attractive loan,” says Joel Singer, chief economist of the California Assn. of Realtors.
Surveys show that most American borrowers still prefer fixed-rate mortgages, but some consumers may virtually be forced to accept an adjustable mortgage because an ARM’s lower initial rate is the only way they can qualify for the loan.
Singer predicts that mortgage rates will travel “a pretty bumpy road” over the next several weeks, but that fixed-rate loans will settle back down in the 10% range by the end of the spring and will stay there through most of the summer.
Mark Obrinsky, an economist with the U.S. League of Savings Institutions in Washington, D.C., says rates could go as low as 9 1/2% by the summer. “But we’re not going to see the 9% fixed-rate loans we saw earlier this year,” he adds.
Obrinsky says homeowners who have been thinking about refinancing with a new, fixed-rate mortgage need to rethink their idea because the recent run-up may make such a move unattractive. A rule of thumb is that refinancing is worthwhile if a homeowner can reduce the interest rate on his mortgage by two percentage points.
Higher Scale
A homeowner using that formula today would have to have an existing loan of about 12 3/4% or higher to make refinancing pay off. But although Obrinsky predicts rates will decline in coming months, he’s not sure whether would-be refinancers should delay their plans until the drop occurs.
“If you stay on the sidelines, you’ll keep paying the higher rate on your existing mortgage,” he says. The expected rate-reduction would be small, he notes, so gambling that rates will go much lower “might not be worth the risk.”
Unfortunately, Obrinksky’s advice isn’t much good for homeowners who have already applied for a refinancing loan and have paid hundreds of dollars for an appraisal and other fees. If refinancing no longer makes sense, their best bet may be to cancel their applications and chalk their losses up to “bad luck.”
As an alternative, these frustrated refinancers can accept an adjustable-rate mortgage or do some additional shopping around to see if they can get a better rate than the one promised by the lender currently processing their loan application.
Rates vary by more than one percentage point from lender to lender, which can make a difference of more than $110 in the monthly payments on a $150,000 loan. Some institutions with the lowest rates will accept appraisals that were done in the last 60 or 90 days, so a borrower who switches from one lender to another won’t have to pay for another appraisal.
Borrowers who have some extra cash should also consider taking out a 15-year loan instead of a conventional 30-year mortgage. Rates on 15-year loans are one-quarter to one-half of a percentage point lower, and their monthly payments aren’t too much higher than those of a 30-year mortgage.
Homes Prices Up 5%
Meanwhile, people shopping for a new home are advised to continue their hunt because fast-rising home prices will likely offset any modest declines in mortgage rates. Home prices have jumped about 5% since the start of the year, and further increases are expected because the inventory of homes for sale is unusually low.
“Prices are going up, so we figured we might as well buy a house now, while we can still afford it,” said Burt Beacon, as he and his wife Janet sat in a West Los Angeles real estate office last week. “But how come it took a year for rates to come down so low, and it only took a few days for them to go all the way back up?”
Beacon’s realtor couldn’t answer his question, but economists and other financial experts are placing much of the blame on the increasingly complex nature of the mortgage market.
Most lenders today sell the fixed-rate mortgages they make to the Federal National Mortgage Assn. (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac) or to similar firms involved in the so-called “secondary mortgage market.” These agencies pool the mortgages they buy, and then sell shares in the pool to big institutional investors, such as insurance companies, pension funds, and other lenders.
Institutional investors won’t buy Fannie Mae and Freddie Mac securities if the interest the securities pay isn’t comparable with the interest paid on corporate or government-issued bonds. Bond rates recently soared amid concerns over the plunging dollar, rising Japanese yen, huge trade deficit and a possible rekindling of inflation.
When bond rates jumped, Fannie Mae and Freddie Mac had to raise the interest payments on the securities they issue to remain competitive.
Instantly, lenders who sell their fixed-rate loans to Fannie Mae and Freddie Mac had to raise their mortgage rates because the two agencies were no longer interested in buying lower-interest loans--and it’s the mortgage-shoppers who have to pay the tab.
