Well, here we go again.
If you happened to miss the refinance opportunities of 1993, 1998 and 2001, the mortgage markets are giving you -- as well as borrowers looking to purchase a home -- another opportunity.
Mortgage rates are bottoming out once again. But not only is the old war horse -- the 30-year, fixed-rate mortgage -- hovering around and even dipping below 6.5 percent, but those adjustable rate mortgages are becoming so tantalizingly low that people in fixed rates might just want to take a look to see whether they can better their financial circumstances.
So what should a borrower do? It depends on circumstances, objectives and how lucky you feel.
Last week, the Freddie Mac 30-year fixed-rate average stood at 6.57 percent, up slightly from the previous week's 6.55 percent, which was the low for the year. The 15-year rate was at 6.03 percent, and the one-year adjustable rate mortgage -- better known as an ARM -- was at 4.58 percent, the lowest since March 11, 1994, when it averaged 4.51 percent.
In Baltimore, the 30-year average last week was 6.59 percent, the lowest ever recorded for the area, according to HSH Associates, a New Jersey-based firm that tracks and analyzes mortgages nationwide. The previous low was in the aftermath of Sept. 11, when rates dipped to 6.66 percent for the week ending Nov. 9.
The 15-year average mortgage rate last week in Baltimore stood at 6.04 percent and the one-year ARM dropped to 4.65 percent, the lowest also since March 1994, according to HSH Associates.
"We are in the sixes now; can we get to 6? I suppose we can," said Alan R. Ingraham, regional vice president for First Horizon Home Loans and president of the Greater Baltimore Board of Realtors. "I think right now there is a greater chance we're going to see 6 in the near term than the chance that we are going to see 7.5. And there is no question that this is going to continue to fuel activity in the marketplace."
When was the last time rates were this good? How about when Gomer Pyle was on prime-time TV?
Shazzam!
"If our forecast holds true, the 30-year, fixed-rate mortgage will have averaged 6.8 percent this year," said Frank Nothaft, chief economist for Freddie Mac, the mortgage giant that supplies funds to lenders by purchasing mortgages. "The last time when the mortgage rate was below 6.8 as an annual average was 1967, 35 years ago. It is a phenomenal time."
One of the hottest products on the market is a government-insured, one-year FHA adjustable-rate mortgage.
"I sell this all the time to young couples and first-time homebuyers," said Bill Heffernan, president of First Home Mortgage in Lutherville, who added that those two groups are typically out of the starter home within four or five years.
An adjustable-rate mortgage is just that -- it adjusts, either up or down, after a certain time period, and it has caps on how much the interest rate can adjust.
Some lenders have been offering the FHA one-year adjustable with a beginning rate of 4.5 percent with the borrower paying one point. A point is 1 percent of the borrowed amount. If you borrow $200,000, that means you'll pay the lender $2,000. A borrower has the option to get a higher interest rate and avoid paying points.
The principal and interest on a $200,000 mortgage -- the FHA maximum loan amount in Baltimore is $261,609 -- would be $1,013 at the 4.5 percent rate. Comparatively, for a fixed 6.5 percent loan, the principal and interest would be $1,264. The borrower would be saving $251 a month.
With an FHA loan, however, there is a funding fee of 1.5 percent of the borrowed amount that can be rolled into the total mortgage, and there is a monthly mortgage insurance fee that is one-half of a percent of the loan amount.
What makes the FHA adjustable additionally attractive is that it can only adjust a maximum of 1 percent on the anniversary of the loan with a lifetime cap of 5 percent. Nongovernment ARMs typically carry a 2 percent annual maximum adjustment and a 6 percent lifetime cap.
Simply then, the worst-case scenario is that a borrower's FHA mortgage could eventually climb to no higher than 9.5 percent. And most lenders would agree that if that mortgage got to 9.5 percent, most conventional mortgages would be in double-digit land.
True, the 30-year, 15-year and one-year mortgage products are enticing, but lenders are also offering other "hybrid" ARMs that strike a balance between interest rate and risk.
The "hybrid" products are presented as 3/1, 5/1 or 7/1 ARMs. Instead of adjusting annually, they hold the starting interest rate -- which is lower than a 30-year rate -- for either three, five or seven years before turning into an annual ARM.
Ingraham at First Horizon has been refinancing clients into a 5/1 ARM that has a starting rate of 5.75 percent. That means the monthly principal and interest payment stays at $1,167 for the first 60 months on a $200,000 loan. The savings in those first five years amounts to $5,820 compared with a traditional 6.5 percent fixed rate.
All of this sounds good to people looking to cut payments or terms, but there is risk, and borrowers should carefully weigh what product would work best for their situation.
"Is this the home that you are really going to want to stay in for a really long time, or do you know because of family considerations or job considerations you'll be relocating in the next five to seven years," Nothaft said. "Why pay for a 30-year loan when you know you're not going to have it for 30 years?"
Said Tom Champion, a loan officer with Wells Fargo Home Mortgage in Lutherville: "You have to look at what makes sense. What are your objectives, because everybody has different objectives."
For Keith Gumbinger, a vice president with HSH Associates, the objective in this market is to lock in a low rate for a long time.
"The thing about adjustables right now is that short-term interest rates are at ... historic lows, [so] over the next few years, that only leaves one place for interest rates to go," Gumbinger said.
"You'll save money for the first five years, but you had better be planning for higher interest rates later because we are likely to return to normal at some point in time, and normal rates will bring you higher payments.
"The time to take a fixed-rate mortgage is when interest rates are low because you want to lock up money for the long term when rates are low. Why would you want to accept the product that brings you the risk of rising rates?
"It is total folly to trade a low fixed-rate mortgage for a very short-term ARM, or any ARM unless you absolutely know with certainty you'll be leaving in a certain time period."
But Nothaft realizes there are always people looking for a deal.
"There are folks who are more risk-takers who see the ARM rate and say, 'I'm going to roll the dice and go with the one-year ARM.' That's really an individual situation because the risk that you are taking on. ... Maybe we'll have a bad roll of the economic dice and we will see those double-digit mortgage rates in the next three or four years -- no one is forecasting them -- but hey."
In the past 10 years, all refinance and low mortgage-rate environments have been created by events.
In 1993, it was the Federal Reserve cutting short-term rates to push the country out of recession.
In 1998, it was the Asian financial crisis that saw a "flight to quality" of cash into the bond market, pushing yields up and interest rates down.
Last fall, it was Fed rate-cutting that was accelerated by the events of Sept. 11.
And this time, it is a more sluggish recovery than what economists expected, coupled with what Gumbinger labeled "corporate malfeasance" as consumers wary of corporate America are staying out of the stock market and keeping their money in bonds or in cash.
"Since 1988 when I got into the business, this has been the most unusual cycle in that it has been prolonged for a long period of time," Champion said.
"The windows of opportunity open and close in a relatively short period of time," Champion said. "But you are having more windows of opportunity. And every time you have one you say this is the last one ... and then there is another one. And then you have that one and well you say that's the end of it, and then there's another one."
How long will this opportunity last?
"I am going to tell you point blank that I don't see any way our rates are going to move much higher than they are now for at least the entire summer -- and more than likely for the rest of the entire year," Ingraham said. "What you get is a feeding frenzy in these financial markets ... a feeding frenzy on the negative, and there is a momentum going in on the bear side and there is nothing to stop them."
Likewise, Nothaft, from his Freddie Mac perch, doesn't see any economic indicators that will push rates upward.
"Basically we are in a period with the recovery entering a phase of a more gradual rate of growth where there doesn't seem to be any inflationary pressure ... and if that is the case, there is nothing that is going to be pushing or driving long-term interest rates up in any significant fashion," Nothaft said.
"So for the foreseeable near term we are going to see mortgage rates remain very favorable. Probably see them bounce between 6.5 and 6.75 [percent] through the end of the summer. Our outlook longer term ... is that mortgage rates ... will remain below 7 percent."
Yet, whether a borrower is leaning toward the fixed-rate for the long term or the adjustable rates, Heffernan of First Home Mortgage doesn't change his speech to customers: "Don't be greedy. It's a great rate. Take advantage of it."