Commentary

Mortgage rates during the past week were generally steady, though up marginally. The zone of movement, however, is low relative to recent years and the result is an enormous surge in refinancing activity.

Is this the bottom of the rate cycle? There are plenty of opinions, pro and con, but as usual no one knows. Instead, it's best to view today's rates as good relative to the rates seen for much of the past decade.

The gap between 30-year fixed-rate loans (conventional financing) and adjustable-rate mortgages (ARMs) continues to grow, with ARM start rates now 20 basis points -- about one-fifth of one percent -- lower than conventional financing.

Because ARMs represent more risk to consumers -- the rates can go up in the future, something not true with fixed-rate loans -- borrowers generally want a start rate 1 percent of more below fixed-rate interest levels. Since rates for ARMs and fixed-rate loans are now fairly close, there is little interest in ARM financing at this time.

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.

• Interest rates are calculated at a given percentage of the loan amount per year, say 7 percent annually. A basis point is equal to 1/100th of 1 percent. Thus if a loan interest rate moves from 6.60 percent to 6.65 percent, it has gone up .05 percent or 5 basis points.

• Loans have a nominal interest rate, say 7 percent, and an annual percentage rate (APR). The APR is important because it includes not only the interest rate, but also such costs as points (loan discount fees), per diem interest, mortgage insurance and other expenses.

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 29, 2001

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