Even as they inch up a bit, today's mortgage rates still look like a
bargain.
Back in September, 1981, the FHA (which used to set
nation-wide interest rates for all the mortgages it insured)
was asking 17.5%. And people who needed to buy, were paying
rates like that in the early 1980s. (We can only hope they've
paid off those loans early refinanced to something a bit lower
by now.)
Those were the days when bankers, trying to find something
people could afford and wishing they could get free of old 5%
loans, invented all sorts of new mortgage plans: graduated payment plans,
rollover mortgages, shared equity loans, and pledged account mortgages. When
the dust had settled, the new arrangement that became part of the standard
array of mortgage offerings was the adjustable rate mortgage.
The adjustable rate mortgage shifts the risk of changing
rates to the borrower. If rates in general fall, the borrower
can benefit next time the monthly payment figure is adjusted.
If rates rise, so will the borrower's interest.
And to make the plan attractive to homebuyers, the
adjustable rate usually carries an appealing initial interest
rate - lower than average current levels. To some homebuyers,
this looks like a "come on, the first one's free" ploy. They
inquire "what would my payment be if this were adjusted to the
rate your long-time borrowers are paying by now?" And they
usually opt, these days, for fixed-rate loans, to lock in
today's relatively low rates for the next 25 or 30 years.
But there are some buyers (a minority these days) who
choose adjustable rate mortgages (ARMs) for good reasons.
Certain ARMs won't adjust for long periods. The low
initial rate may last for three years, five years, or sometimes
even seven years. The buyer who doesn't expect to live in the
house any longer than that may jump at the lower monthly
payments.
It's always prudent to ask, however, what happens to the
shortfall when the payment doesn't cover today's true cost of
money. In a few instances, the money that isn't being billed
is added to the amount of the loan -- a condition called
negative amortization. At the end of the year, the borrower
owes more than at the start. Again, though, even that might
not worry the buyer in an area where prices are skyrocketing,
so that the sale will more than take care of the problem of
paying off the higher loan.
For someone who anticipates rising income (a professional
just starting out, for example), qualifying for the lower
rates on an ARM can mean borrowing more and thus buying a more
ambitious house.
And if rates ever shoot up to 17% again? We'll face that problem when we
come to it.
For more interest rate news, check out the Realty Times Interest Rate Watch
Published: June 17, 1999
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