With mortgage rates starting to dip, some homeowners are having second thoughts about the adjustable-rate loans that once looked so appealing.
For many people, adjustable loans with low introductory rates meant the difference between buying a home or staying put last year, when rates on 30-year, fixed-rate loans shot up nearly 2 1/2 percentage points.
But rates on fixed loans have slid to the levels of last March -- below 8 percent. And that has narrowed the gap between rates on the two types of loans enough for adjustables to lose much of their advantage.
"There are not a lot of reasons to look at an ARM unless you're looking at an extremely short time frame" living in a house, said Keith T. Gumbinger, a vice president at HSH Associates, a Butler, N.J., firm that tracks Baltimore's mortgage market.
"Are people shifting from adjustables to fixed rates? Absolutely."
Last week, rates on 30-year loans averaged 7.79 percent in the Baltimore region, compared with an average of 5.83 percent for introductory one-year ARMs, according to HSH Associates.
The latest statistics from the Federal Housing Finance Board show that adjustable loans accounted for 41 percent of new mortgage originations in April, down from 59 percent in January.
By the end of May, the ARM share had shrunk to a quarter of all loans "and [was] falling fast," Mr. Gumbinger estimated.
During the past few weeks, hundreds of phone calls have come in to Baltimore American Mortgage from borrowers with adjustable loans who are facing a rate increase this year, said Dave Eilertson, a loan officer at the Hanover, Md.-based company.
Most adjustable loans can increase a maximum of 2 percent per year, with a 6 percent increase cap over the life of the loan.
In many cases, borrowers with loans at 6 1/2 percent that will adjust to 8 1/2 percent this year are opting for fixed loans, Mr. Eilertson said. Sometimes a borrower can actually lower his or her monthly payment that way. Others end up with the same monthly payment they would have had, but like the stability of a fixed-rate loan.
"Those consumers are getting used to how an ARM works -- and not liking it," Mr. Eilertson said.
Because his company offers refinancing with no points or closing costs, in exchange for slightly higher interest rates, some borrowers have opted to refinance to another one-year adjustable loan to keep their monthly payments from going up, he said.
Economists have been predicting that the narrowing gap between fixed and adjustable rates will prompt a wave of refinancings, though not of the proportions of the "refi" boom of ,, 1993 and early 1994.
Borrowers refinancing their mortgages fall into two groups, those whose ARMs have adjusted upward, who've found the fixed rate level close to or below their new adjustment, and those with relatively high fixed rates, he said.
"People who took [fixed] rates in the upper 8s or 9s and didn't pay points may find it worthwhile, with rates below 8 percent," he said.
But few people remain in that category, he said. Many already refinanced during the earlier boom, when rates hit 20-year lows of below 7 percent.
When deciding whether to refinance, borrowers must consider factors other than rate, such as the closing costs involved and how long they intend to stay in a home, said William E. Teal, Lutherville branch manager of Norwest Mortgage Inc.
"A lower rate isn't necessarily a better thing, if you have to pay three points to get 7 1/2 ," he said.