Playing the mortgage game

Homeowners still in it despite higher rates

The Federal Reserve may be trying to cool down a torrid economy by raising short-term interest rates, but someone forgot to tell home buyers, as well as bankers pushing a host of mortgage loan products.

Since last June, the Fed has hiked rates 125 basis points, or 1.25%-and will likely raise rates at least another 25 basis points on May 16-in an effort to head off inflation. Despite the Fed’s actions, mortgage rates have gone up only fractionally since last year, although currently, they are at the highest level since June 1996 when the average 30-year fixed rate mortgage was 8.03%. They’re expected to shoot even higher later this year, to 8.09%.

Historically, today’s rates don’t even compare to the double-digit levels last seen in the early 1980s, says Keith T. Gumbinger, vice president of HSH Associates, a provider of consumer loan information in Butler, New Jersey. The flip side of the coin: today’s 8%-plus mortgage rates are substantially above 31-year low of 6.68%, last seen in October 1998, making some folks nervous.

But despite this rising-rate environment, the number of first-time homeowners has soared from 1996 to 1999, setting new records each year. That number leveled off at 40% in 1999.

Mortgage analysts say some realtors, in an effort to gain more customers, are encouraging first-time home buyers to look at other loan products aside from fixed-rate mortgages (see “The Most Home for Your Money,” this issue).

One popular choice is the less expensive adjustable rate mortgage (ARM). Bankers are pitching ARMs to the single home buyer who may marry at a later date and wish to sell his or her home. In addition, hybrid ARMs, which initially offer a fixed rate, then later adjust to a variable rate, are now available in three-,

five-, seven- or 10-year increments.

Home buying is also on the rise because of the opportunity to purchase a home with little or no money down, says Gumbinger. Twenty-five years ago, a 20% down payment was a common practice when buying a home. Nowadays, the average “real-world down payment” is between 3%-5%, says Walter Molony, a spokesman for the National Association of Realtors in Washington, D.C. In many instances, mortgage companies will finance closing costs, allowing many first-time buyers to walk into a brand new home having paid close to nothing.

So in spite of Alan Greenspan & Co. jacking up interest rates now and in the future, the mortgage market should remain robust.

The Best 30-Year Fixed-Rate Mortgages in the Top Metros

City

Lender Name

Rate

Down Payment

Points

Telephone

New York Brooklyn Federal Savings Bank 8% 5% 2 718-855-8500
Los Angeles American Commerce Mortgage 8 5 1.75 714-970-9700
Chicago Countrywide Home Loans Inc. 8.375 5 2 630-510-7753
Philadelphia Fox Chase Federal Savings Bank 8.375 5 0 215-342-3700
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