More people switching mortgages
Published: Thursday, January 4, 2007 at 6:01 a.m.
Last Modified: Wednesday, January 3, 2007 at 11:10 p.m.
NEW YORK — Lawrence Jones knew he was taking a chance on interest rates when he agreed to an adjustable-rate mortgage in 2002.
Jones, who works with a heating and air conditioning company and owns a three-bedroom home in Monroe, N.C., said that the first year, there was no change in his interest rate. But the rate went up a percentage point in each of the next two years.
The rate was going to notch up another percentage point last fall when Jones and his wife, Delesia, decided it was time to refinance and eliminate the increases with a 30-year, fixed-rate mortgage.
"I wanted to stay under 7 percent," Jones said. "I'm a person who likes certainty, and I'm getting that with my new mortgage."
In recent months, thousands of homeowners like the Joneses have grown uncomfortable with the rising rates on their adjustable mortgages and have been switching to the fixed-rate variety, mortgage experts say. The advantage is that they lock in an interest rate — and a monthly payment — so that budgeting becomes more predictable.
They can thank the Federal Reserve, which through most of 2006 pushed up short-term interest rates, boosting the costs of adjustable-rate mortgages and other short-term loans, while the rates on long-term debt remained flat.
Jim Svinth, chief economist at LendingTree, an online mortgage marketplace based in Charlotte, N.C., said he's been seeing a surge in refinancing of ARMs for the past six to eight weeks. He expects the trend to continue well into 2007.
Among the reasons people are switching is that the difference in the rate on adjustable mortgages and on fixed mortgages has narrowed, he said. For example, the rate on a mortgage that can adjust annually was 5.84 percent in recent weeks, compared with about 6.22 percent on a fixed-rate mortgage.
Many borrowers are opting to pay a little more for the fixed-rate mortgage to avoid the risk of a reset on an adjustable mortgage in the future, Svinth said.
"We're seeing a lot of people who are saying they'd rather pay half a percent in rate and have the security of a fixed loan, particularly given that the absolute level of rates is down," he said.
Overall, there's less demand for mortgages because rates have been on the rise and because home prices have become so expensive that many families have been priced out of the market or are waiting until prices start to come down.
Still, Mike Fratantoni, senior economist with the Mortgage Bankers Association, an industry group based in Washington, D.C., said refinancings have been strong.
About half of all mortgage applications have been for refinancing, and applications in December were at the highest level in 14 months, the association's survey found.
And more families are opting for fixed-rate mortgages, Fratantoni said.
The group's latest survey of lenders of found that ARMs had fallen to 20.4 percent of mortgage applications in the final week of 2006. That's well below the all-time high of 36 percent in March 2005 and the lowest percentage since mid-2003.
Michael L. Moskowitz, president of the New York-based mortgage company Equity Now, said each family needs to evaluate its current situation to determine if refinancing makes sense.
"If you have an adjustable-rate mortgage and it's moved up close to the fixed rate, go for the fixed," he said.
But homeowners with a hybrid mortgage — say a fixed rate for five years, then an annual adjustment — that has several years to go before it begins resetting "might want to stay with what you've got."
Another factor to consider is how long you're going to stay in the house, Moskowitz said.
"If the family thinks they're going to move in three or four years, why bother" to pay a premium for a fixed-rate loan.
Moskowitz also believes that mortgage rates "which have been pretty good ... could go down another quarter point over the next year." But he cautions: "Of course, nobody really knows for sure."
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