Weekly survey: Mortgage rates stay flat
By Holden Lewis • Bankrate.com

Mortgage rates barely budged this week. Like a good visit with a doctor, the economic news was quiet and unsurprising.

The benchmark 30-year fixed-rate mortgage rose 2 basis points to 5.60 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.34 discount and origination points. One year ago, the mortgage index was 5.82 percent.

The 15-year fixed-rate mortgage rose 1 basis point to 4.92 percent. The one-year adjustable-rate mortgage fell 5 basis points to 3.55 percent.

Why the rates stood still
A mildly unexpected revelation came Tuesday, when the Conference Board said consumer confidence index had taken a blow. Wall Street yawned, checked its watch, and headed out the door for lunch.

Mortgage bankers choked on their arugula, though, when they heard Alan Greenspan say something truly unusual.

Here's what Greenspan, chairman of the Federal Reserve, said in a speech this week: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

Mortgage lenders around the country replied, "Huh?"

For Greenspan to complain about a lack of variety in mortgages is like the head of the FDA complaining that supermarkets don't stock enough flavors of cereal. Heck, Mikey likes three kinds of Life cereal (original, cinnamon and honey graham) and there are five varieties of Chex (not counting the three kinds of Chex breakfast bars).

If the mortgage industry were a supermarket aisle, it would take a long time to walk down it. Anyone who took out a mortgage in the past five years was amazed at the variety of loan types: adjustable, hybrid adjustable, fixed-rate, interest-only, piggyback and equity line of credit.

Greenspan said something else about mortgages in that speech to the National Credit Union Association. He said homeowners can save money by getting adjustable-rate mortgages instead of fixed-rate loans. Any mortgage banker will tell you that an adjustable has a lower initial rate and saves money, at least in the short run and probably in the long run, too. But it's unusual for the chairman of the Fed to dispense advice on personal finance.

Greenspan's call for ARMs
The Fed's research, Greenspan said, "suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward."

But, of course, rates trended downward, so his observation is valid for the last 10 years. With mortgage rates near 40-year lows now, it's unlikely that they will continue their downward trend.

The prospect of rising rates didn't deter 27 percent of borrowers from getting adjustables last week and the week before. Whether it's wise to get an adjustable depends on your circumstances -- chiefly, how long you plan to keep the house -- and your temperament: When it comes to keeping a roof over your head, do you prefer to be cautious or a risk-taker?

"This is something that we've been talking about for a long time," says Bob Walters, vice president for Quicken Loans and a big fan of adjustable-rate mortgages. "We know that people aren't in their homes for a long period of time and they've got this fixation on fixed. We know they pay a very large premium (for having a fixed-rate mortgage). When Alan Greenspan says something like this, it's a pretty watershed time."

The financial press is a big proponent of fixed-rate mortgages, Walters laments. "But I don't think they understand that there's a huge cost to doing so."

For example, he notes that the typical 5/1 ARM -- an adjustable with an initial rate that lasts five years and then adjusts annually after that -- has an initial rate of about 4.25 percent, while the typical 30-year fixed sports a rate of about 5.75 percent. For someone borrowing $200,000, the ARM would cost $183 less a month than the fixed. Over five years the total payments on the ARM would be $11,000 less.

'That's a year in college'
"Consider that difference," Walters says. "That's a year in college. That's a new kitchen. It's an enormous sum of money." Greenspan is pointing out that borrowers are better served by adjustables, "and the good news is people are understanding this," Walters says.

Not all mortgage bankers buy Greenspan's argument. Rob Bernabe, head of retail mortgage lending for E-Trade Mortgage, says, "Generally speaking, we have found that consumers love certainty, particularly as it comes to their home." That's why E-Trade underwrites mostly fixed-rate mortgages, and why it offers guaranteed pricing of certain closing costs.

Bernabe acknowledges the logic of the case for adjustable-rate mortgages. "If you look at a 5/1 ARM and you were to refi that loan every five years, certainly there would be money to be saved," he says. "The question is whether rates will rise so much in the next five years that it wouldn't be a good idea."

Bernabe says lots of factors could drive rates sharply higher in coming years: an improving economy, the federal budget deficit, higher inflation. Lots of people have "very painful memories" of the early 1980s, when fixed rates exceeded 18 percent.

"Those of us who have been around the block a couple of times certainly like our five-and-a-half fixed-rate mortgages for 30 years," Bernabe says.