Commentary

Mortgage rates during the past week generally trended down, with rates for 15-year fixed rate loans firmly below 6.5 percent and rates for 30-year fixed finanacial well under 7 percent.

Adjustable rate mortgage (ARM( rates, in contrast, were essentially at the interest levels for fixed-rate financing, and actually above fixed-rate quotes for part of the week. Because ARMs represent more risk to borrowers (because future rates and monthly payments can go both up and down), lenders have priced ARM financing with start rates well below interest levels for 30-year fixed-rate mortgages, sometimes 1 percent or more lower.

In effect, borrowers now have little reason to opt for ARMs, a reality which will remain unchanged until initial interest levels for adjustable loan products fall significantly below fixed-rate financing.

Notes

• Thirty-year, fixed-rate financing with 20 percent down, a conventional loan, consists of a mortgage with 360 monthly payments of equal size and an interest rate which remains constant throughout the life of the loan. At this time, conventional fixed-rate loans of up to $275,000 are available in the lower 48-states. In Hawaii, Alaska, Guam, and the U.S. Virgin Islands the loan limit for fixed-rate conventional financing is $412,500.

• Fifteen-year, fixed rate financing has a larger monthly payment than a 30-year loan, but lower interest rate and a smaller potential interest cost. Example: Suppose that the current interest rate for a 30-year fixed-rate conventional mortgage is 7 percent and the interest rate for a 15-year loan is 6.80 percent. For a $100,000 loan, the 30-year borrower would pay $665.30 per month for principal and interest. The total interest cost over 30 years (360 payments) would be $139,508. For the borrower who tales out a 15-year fixed-rate loan for $100,000, the monthly cost for principal and interest would be $887.68. Over 15 years (180 payments), the total potential interest cost would be $59,978.

• A jumbo loan is, essentially, a 30-year mortgage but with a loan amount above the conventional loan limit, in this case $275,000 for a single-family home in the lower 48 states. Because a larger loan amount is outstanding, lenders have more risk and so interest rates are somewhat higher than for conventional financing.

• An adjustable rate mortgage (ARM) is a form of financing which typically has an initial "start" rate lasting six months or a year, and then rates which change on a regular schedule. Because the interest rate changes, monthly payments can also rise or fall. The interest rate changes are based on an index not controlled by the lender such as the average price of Treasury bills over six months or a year, loans made by the Federal Home Loan Bank in San Francisco to lenders in California and Nevada (what's known generally as the11th District Cost of Funds Index), and the LIBOR rate (the London Interbank Offer Rate, a measure which relates to the cost of borrowing in Europe).

  Most ARMs have annual and lifetime interest caps, and also annual and lifetime monthly payment caps. Some ARM mortgages allow lenders to collect "negative amortization," an expression which means the interest cost is greater than the monthly payment, so the size of the debt increases.

Be aware that the rates presented here may not reflect the rates for individual loan products at any given time, and that rates are constantly in flux. For additional information regarding current mortgage rates, please consult the Bank Rate Monitor

Published: January 15, 2001

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