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Don't let blipping rates get you down

The recent roller-coaster ride in mortgage rates has slowed fever-pitched lending, but homebuyers and refinancers need not be put off by the recent rise from 45-year-low rates.

Whether you need to keep monthly payments below a certain threshold to buy a house, or you didn't hop on the refinancing bandwagon soon enough, a number of mortgage products are gaining favor, lenders said.

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"People are much more willing to look at alternative products like adjustable-rate and interest-only [loans], whereas 30 days ago the interest level was not quite the same," said Paul Fein, senior vice president for GMAC Mortgage Corp.

And all is not yet lost for those still in the market for the traditional fixed-rate loans.

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Freddie Mac projects that home-loan rates will taper back down toward the end of the year, said Amy Crews Cutts, the mortgage company's deputy chief economist. Indeed, mortgage rates for the 30-year benchmark loan dipped below 6 percent last week, the lowest level in eight weeks. Rates hit a low of 5.21 percent in June.

"The economic fundamentals really support mortgage rates between 5.75 and 6.25 for the near term, with the lower end being more likely," Cutts said.

Loans can be tailored for almost any individual need, and some lenders offer as many as 300 different products, said Doug Duncan, chief economist for the Mortgage Bankers Association.

"There are more options and possible good fits for the customer, but it means the customer has to spend more time being careful of the properties of the loan," Duncan said. "The educated consumer studies the payment process over the life of the whole loan, not just what it takes to get into the house."

Adjustable-rate mortgages (ARMs) of many stripes are popular with customers at Countrywide Home Loans, said Vijay Lala, the company's senior vice president of product development. "We're trying to let borrowers know they have multiple options."

Among the offerings:

Interest-only ARMs. "A lot of the ARM products today are offered both with principal normally amortizing and with an interest-only feature as well," said Fein of GMAC Mortgage. "That's going to lower your monthly payment considerably."

By cutting out payment on the principal amount borrowed, monthly payments on a 6 percent $200,000 loan may be $1,000 compared with $1,200 for a principal-included mortgage payment, he said. The ability to deduct mortgage interest is a plus, but borrowers should be aware of the potential drawbacks of paying only interest, Duncan said.

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These loans may be somewhat more sensitive to price changes than a fully amortizing loan, particularly in overheated housing markets, he said.

"If you're paying both principal and interest, then if prices fall you owe less because you've been paying some principal," Duncan said. "You don't exhaust all of your equity as fast."

His recommendation: "Make the loan officer explain to you what the payment process is and what happens under different scenarios of home prices."

Negative amortization. Taking the interest-only idea to a greater extreme - not only does the principal balance go unpaid, but it actually goes up as borrowers underpay their loan, Fein said.

"There's a shortage between what I'm paying and what the loan is amortizing at," he said. "That difference gets added on to the principal balance."

This loan can be risky, though, in a market where prices stay flat or rise only marginally for an extended period. Negative amortization tends to be underused when rates are low because people don't like to see rising principal balances, but customers soon may warm to its advantages, Fein said.

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"If rates continue to rise, that would be a program I'd expect to see a little more often," he said.

Balloon mortgages. As the name implies, balloon mortgages typically offer below-market interest rates for a term of either five or seven years and then escalate payment amounts at the end of the loan, Lala said.

"Balloon mortgages typically allow a borrower to get a bit of a break on the rate, but it's less attractive as the borrower has to pay the entire loan off."

Unless, of course, you have a control mechanism built into the program, Fein said, in which case the rate may be reset at the end of the loan.

"But if rates are higher than the predetermined ceiling, then that loan could be due and payable," Fein said.

Even so, many people view a balloon loan as a short-term vehicle that benefits their cash flow, Fein said. "Most people who effectively use ARM and balloon products go in with the idea that somewhere over the next five or seven years, the market will stabilize and rates will be better and I'll refinance into a fixed-rate product."

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Hybrid ARMs. These are combinations of adjustable and fixed-rate products that either start out as a fixed rate and become adjustable or vice versa, Duncan said.

"They're different than a balloon because a balloon can start out either fixed or adjustable but at a certain point the entire balance is due. With a hybrid, that isn't true. It's just that the terms change at a particular point in time."

Pay option. Consider it a monthly adjustable-rate mortgage.

Countrywide borrowers can see four payment options on their monthly statements, allowing them to choose between the minimum, an interest-only payment, or a 15-year or 30-year amortizing payment, Lala said.

Borrowers have to make at least the minimum payment, which consists of a start rate as low as 1.95 percent amortized over 30 years. The interest rate on this loan can adjust monthly, but the payment is fixed for one year with a maximum payment increase of 7.5 percent each year.


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