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Mortgage rates may have hit rock bottom


ORLANDO, Fla. -- If you've been on the sidelines waiting for mortgage interest rates to hit bottom before buying a house, experts say it's time to get into the game. Mortgage rates are about as good as they are going to get.

In fact, mortgage rates rose slightly last week in an odd surge.

Experts think the move may be fueled by investors' ongoing fears of inflation, but they also believe the trend will be short lived.

"My feeling is that it's just a blip and rates will settle back down," said Paul Havemann, vice president of HSH Associates, a publisher of mortgage information in Butler, N.J. "There's no sustained economic recovery to support higher rates yet."

With a national economy mired in recession and no recovery foreseen until late spring or early summer, interest rates should be attractive for the upcoming home buying season, experts say.

But would-be buyers shouldn't wait for the market to drop much further, experts add. Given the time it takes to find a house and get a mortgage approved, starting the search now will allow buyers to cash in on the low rates before they head up again.

"Right now, 30-year fixed-rate loans are averaging about 8.25 percent across the country. We could see some marginal easing off that, but 8.25 percent is going to be the bottom or close to it," said Mark Obrinsky, senior economist for the Federal National Mortgage Association, or Fannie Mae, in Washington, D.C.

Mr. Obrinsky predicted that mortgage rates will remain "reasonably low" for the rest of 1992. However, he said, rates should begin to rise again if the economy picks up steam as expected in the summer.

"I think even with a modest recovery, we'll see mortgage rates head back up to around the 9 percent range," Mr. Obrinsky said. "That would still be a very good interest rate and very affordable for the vast majority of buyers, but it's not 8.25 percent."

"Rates are good; they'll be good for a while, but they won't be this good forever."

Initial rates for one-year, adjustable-rate loans are averaging about 6 percent, more than 2 points under the average for 30-year fixed-rate loans.

Mortgage experts say that one-year ARMs usually are a good deal when there is at least a 2-point spread between ARM rates and 30-year fixed rates.

Consumers are cautious about ARMs because they have the potential for annual payment increases. But given the initial rates of about 6 percent, and the built-in protections of annual and lifetime payment caps, ARMs are a good deal no matter what happens to the economy, Mr. Obrinsky said.

The current low rates have not eliminated volatility in the mortgage market, where rates can rise and fall on a daily -- or even hourly -- basis. Betsy Clarke, vice president of secondary marketing for Princeton Financial Corp. in Orlando, said coming financial events in the next few weeks could have a bearing on buyers in the market now.

For example, Ms. Clarke said, Congress and the Bush administration are working on the details of an economic stimulus program. When the details are revealed in late January after Mr. Bush's State of the Union speech, the market could experience "a hiccup," Ms. Clarke said.

"It all depends on how the market reacts to it [the program]," Ms. Clarke said. "If the program looks like it's going to work without causing a lot of inflation, then the market could remain fairly stable. If it is not well-received, then we could see lenders tighten credit a little bit by raising interest rates."

Similarly, economists are waiting to see the results of the quarterly auction in February of U.S. Treasury bonds and notes, which provide the federal government with working capital.

If the government has to pay higher interest rates to attract institutional and foreign investors, that could push mortgage rates higher, Ms. Clarke said.

However, on the whole, Ms. Clarke predicted mortgage rates will remain below 9 percent for the next few months.

What do low interest rates mean for consumers? For some home buyers, it means they can afford a bigger and better house.

Howard Howland, vice president of Contemporary Mortgage Services, Inc. in Altamonte Springs, Fla., said a couple with a $40,000 annual income could have afforded a $95,000 house a year ago when 30-year fixed rates were about 10 percent. His example is based on a $90,250 mortgage with monthly payments of $948, including taxes and insurance.

With a 30-year, fixed-rate loan at 8 percent, Mr. Howland said, the same couple can qualify for a large enough loan to buy a $110,000 house. They can afford a $104,500 mortgage with monthly payments of $945, he said.

fTC "I'm seeing people come in and be surprised at just how much they can afford," Mr. Howland said. "A lot of people don't realize ++ what is within their means."

For moderate-income, first-time buyers, lower rates can mean the difference between qualifying for a mortgage, or remaining a renter.

Ross Bennett, vice president of Market Street Mortgage in Maitland, Fla., said that when interest rates were at 10 percent a year ago, buy ing an $80,000 house with a 5 percent down payment -- meaning a $76,000 loan amount -- would have required an annual income of $32,300.

Today, with an interest rate of 8 percent, the same deal requires an annual income of $27,600, or $4,700 less. With an ARM carrying an initial rate of 5.5 percent, the annual income required is $22,300, Mr. Bennett said.

"We're talking rent payments," he said. "What people are paying for rent these days is the same thing you can get a mortgage for."

The fact that rates are so low has caused several changes in the marketplace, prompting some lenders to change their normal business practices.

Virginia Strang, correspondent lending manager for Commonwealth-United Mortgage in Winter Park, Fla., said some prospective borrowers who are refinancing their existing loans have obtained all the necessary approvals, but are waiting to close; they want to see if rates will fall further. Some of those are people who borrowers applied to refinance several months ago and obtained 60-day lock-ins, but let the lock-ins expire.

"My office is bulging with applications that have been approved, but the people aren't closing. That's a problem for lenders because they don't get paid unless the loan closes," Ms. Strang said.

To compensate, some lenders have begun limiting borrowers to a 15- or 30-day lock-in period, Ms. Strang said.

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