Mortgage interest rates, which have zigged down and zagged up during the past 12 months, have zigged down again this summer, sparking a new flurry of inquiries and loan applications.
This time, though, many of the customers are looking to buy a home, often a first home, rather than refinance an existing mortgage, as was often the case last winter, the last low point for interest rates.
Buyers, particularly those nearing retirement, are also increasingly choosing 15-year mortgages instead of the more traditional 30-year loans, and they are spurning the lowest rates -- those offered on one-year-adjustable mortgages, or ARMs -- for higher but less volatile fixed rates.
In choosing fixed-rate loans over adjustables, however, borrowers may be missing out on the savings they could achieve if interest rates flatten or fall further. Indeed, homeowners who took out adjustable-rate mortgages in the 1980s have watched their monthly payments drop significantly in the last year.
And should adjustable rates rise, even to levels higher than today's fixed rates, the savings in the earlier years of the adjustable loan may still keep borrowers ahead.
R. Frank Gooden, owner of First Merchant's, a mortgage broker in Brooklyn, N.Y., said that adjustable rates could benefit not only borrowers who plan to sell their homes in three to five years but also those who plan to own their home longer and believe interest rates will remain relatively low.
He added that annual and lifetime caps will protect today's borrowers who chose adjustable loans from the sudden high increases that occurred early in the 1980s.
"There is a case for the adjustable, but unless a person is financially sophisticated they are not going to figure it out," Gooden said.
Despite the potential rewards with adjustables, most new mortgages today bear fixed rates.
"ARMs are only doing about 5 percent of the market right now," said Paul S. Havemann, a vice president at HSH Associates in Butler, N.J., which surveys 2,000 lenders nationwide each week. "It happens when fixed-rates get low. Right now, you can pick up 7.5 percent on a fixed. It wasn't too long ago that that was a good adjustable figure."
Last month, Bob Greenwald, a 39-year-old stockbroker in Newburgh, N.Y., contemplated taking an 4.25 percent adjustable-rate mortgage when he purchased his first home, a split-level, three-bedroom raised ranch for $147,500. The mortgage even had a conversion feature that, early in the life of the loan, would allow it to be converted to a fixed rate for a $250 fee. The mortgage also had an annual 2 percent interest rate cap and a 6 percent lifetime cap.
Even so, he went with a 15-year fixed-rate: 7.875 percent with 1.75 points; a point equals one percentage point of the total amount of the mortgage and is paid at the closing.
"I just didn't want to assume the risk of an adjustable -- I didn't want to gamble," said Mr. Greenwald, who made a $47,500 down payment and will be making mortgage payments of $1,200 a month.
"I thought about all the things I tell my clients," he added. "That there doesn't seem to be any inflation either this year or next, but that there are structural economic problems -- like an overpriced real estate market, the problems in commercial real state, the aging of the baby boomers -- that are obviously a concern. So, a fixed seemed like the conservative way to approach it."
To be sure, these are conservative times. Most prospective homebuyers watched or participated in the boom and bust of the 1980s real estate market and they remain cautious, even when they are offered mortgage interest rates at levels not seen since July 1973.
Even those who have benefited from adjustables are unsure if they would take one out today. Billy Stephen of Brooklyn, for example, took an adjustable loan seven years ago when he bought a $120,000 weekend house in Woodstock, N.Y. Since then, the rate on the loan has dropped from 11.75 percent to 7.65 percent, and his monthly payments have fallen from $1,275 to $1,004.
Nevertheless, Mr. Stephen, who is a real estate broker, said "I'd take out a fixed today like everybody else -- the rates can't go any lower."
Rates, for the most part, began falling in the mid-'80s, with zigs and zags along the way since then. They peaked in 1984 at 14.76 percent for fixed-rate loans and 12.09 percent for adjustables and now stand at about half those levels.
As of Thursday, the national averages, according to HSH Associates were 8.17 percent for a 30-year fixed-rate loan and 5.26 percent for a one-year adjustable. Moreover, HSH also found that 545 banks and brokers were offering fixed-rate mortgages at 8 percent or less and 475 were offering adjustables at 5 percent or lower.
Average rates as reported by the Mortgage Bankers Association on Thursday were even lower: 8 percent for a 30-year fixed rate and 5 percent for a one-year adjustable. The association tracks the rates at 20 large mortgage banking firms.
"I think the rates will continue to drop slightly, ever so slightly at this juncture," said David A. Lereah, the association's chief economist. "I don't think there will be a big drop unless the Federal Reserve Board does something."
The last time the rates were as low they as they are now was in January, following cuts in interest rates by the Fed just before Christmas; the 30-year fixed mortgage rate hit 8.23 percent on Jan. 10.
During the spring, though, rates turned higher, only to descend again after July 2, when the Fed cut to 3 percent the discount rate, which is the rate it charges banks for loans, and lowered the federal funds rate, the rate banks charge each other for loans, to 3.25 percent.
The Federal Reserve Board is not expected to consider another rate change before the July producer price and consumer price reports, which measure inflation, are released this week.
"There will be a lot of breath-holding until then," Mr. Havemann said.
The lower rates have sent mortgage applications -- both for refinancings and new mortgages -- surging over the past few weeks, as it did earlier in the year. Volume, as reported by the Mortgage Bankers Association, dipped 3 percent in the week ending July 31 over unusually high volume reported a week earlier. Compared with a year ago, though, the number of applications has shot up 176 percent.
"There has been a real frenzy in the applications market since July 2," Mr. Lereah said.
About 40 percent of the applications are for new mortgages; the balance are refinancings, according to figures compiled by both HSH Associates and the Mortgage Bankers Association.
In January, only about 20 percent of the applications were for new mortgages.
"Purchases are up somewhat, but it is hardly on the order of a gold rush," Mr. Havemann said, noting that many of the applications were from people who missed out on the refinancing activity last winter.
Walter Molony, a spokesman for the National Association of Realtors in Washington, said that the rise in applications will likely result in increased home sales in August and September. He added that the number of projected sales for the year was now 3.48 million, 8.1 percent over last year's total and the best figure since 1988.
"What we are hearing, anecdotally, is that people are coming through the door, and in some markets you are getting a lot of lookers, who are making careful weighed decisions," he said. "We feel the trend will be for increasing sales for the rest of the year."
Mr. Lereah said that of the total applications -- refinancings as well as new loans -- 20 percent were for adjustable rates and the balance for fixed rates. In 1986, at the height of the overheated '80s real estate market, the percentage of applications for adjustables was 31 percent.
"If rates are higher, people tend toward ARMs more," he said. "They make payments more affordable, particularly for young people."
One damper on adjustables for some borrowers is tighter qualification standards that require them to show income sufficient to support interest rates higher than the one they will be paying initially.
"It is tougher today to qualify for any mortgage," said David J. Totaro, a senior vice president and chief marketing officer at the Dime Savings Bank in Manhattan.
Adjusting to adjustables
But adjustables do have their supporters. James Collins, a state bank examiner, recently took out a 4.5 percent adjustable $200,000 mortgage to buy a four-bedroom colonial in Valhalla, N.Y.; he paid three points and put $60,000 down.
"It was the only way I could meet the monthly payments based on my salary and the amount I had to borrow," he said.
His mortgage also has a 2 percent annual cap and a 10.5 percent lifetime cap. He added that when he applied for the mortgage fixed rates were hovering around 9 percent.
"My savings for the first two or three years would be more than if I took a 30-year fixed," he said. "But rates have come down a little since then."
Asked if he would still take an adjustable now that 30-year fixed rates had dropped to about 8 percent, Collins, 38, said: "I would think about it more, but where can you borrow money at four and a half percent."
Collins added that he also may be looking to move in two or three years, which makes an adjustable rate more attractive than locking in a higher long-term rate. "It's sort of like buying time for the first two or three years," he said. "We are gambling a bit."
While some homebuyers are looking to lower their payments, others are increasing them by taking out 15-year mortgages. About 35 to 40 percent of the new mortgages -- and about half of the refinancings -- are for 15 years, according to HSH Associates.
"The 15 year has been growing because the rates are coming down," said Mr. Totaro of the Dime Savings Bank. "We are finding that most people who can afford to take a 15-year product will take it."
The primary impetus for a shorter mortgage is to reduce the amount of interest paid out over the life of the loan or, among older borrowers, to pay off the mortgage prior to retirement.
"There is a desire out there to retire their mortgage quickly," said Alan J. Cicchetti, a senior vice president at Connecticut National Mortgage Co. in Hartford, Conn.
The 15-year mortgage, though, is generally not the loan of choice for most first-time home buyers, who are often scrambling to save for their down payment and to keep their monthly obligations as low as possible.
"There are many more first-time homebuyers than we have had in the past and fewer people trading up," said Bruce R. Lublin, president of Homerica, a mortgage broker in Harrison, N.Y. "They are coming in now because housing prices are coming down and interest levels are at their lowest level in 20 years."
Mr. Totaro noted that many of the applications for the new mortgages are first-time buyers who are either in their late 20s or older and were priced out of the housing market in the 1980s.
"We did some focus groups in the past two weeks in New Jersey and New York, and we were very surprised," he said. "A large percentage were first-time homebuyers."
To help these new mortgage buyers, Totaro noted that there are several programs being offered that were unavailable a few years ago. One product for first-time buyers is a one-year adjustable-rate loan that offers 100-percent financing if a parent, relative or employer puts 20 percent of the amount of the loan into a certificate of deposit, which is held by the Dime until the loan is paid down to 80 percent.
"Our research indicated that, for most first-time home buyers, the problem was not in making payments, but coming up with the down payment," Mr. Totaro said. "And most buyers were looking to their parents for that down payment."
Another new product is a Fannie Mae (Federal National Mortgage Association) Community Home Buyer's Loan, which offers 95 percent financing for those applicants who qualify and fall under household-income limits. In the past, applicants in the New York region were often at a disadvantage because of the region's high median income and home prices. Under a new version of the plan, though, residents of New York City, Westchester County, Rockland County and Putnam County now qualify even if they earn up to 150 percent of the region's median income. This means that in New York City, where the median income is $40,500, applicants can make up to $60,750 and still qualify.
In other parts of the New York metropolitan region, such as Fairfield County, Conn., and Bergen County, N.J., the limit is 115 percent, meaning that in a town such as Stamford, Conn., where the median household income is $73,300, applicants can earn $84,295 and still qualify.
"It was 75 percent," Mr. Totaro said. "Now, if you make a little over the local average you can qualify."