mortgage

Mortgage rates climb for third week

The 30-year fixed-rate mortgage rose for the third straight week, albeit modestly.

The benchmark 30-year, fixed-rate mortgage edged up 2 basis points, to 5.67 percent, according to the Bankrate.com's 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 0.36 discount and origination points. One year ago, the mortgage index was 6.74 percent; four weeks ago, it was 5.58 percent.

The benchmark 15-year, fixed-rate mortgage fell 4 basis points, to 4.93 percent. The benchmark 5/1 adjustable-rate mortgage tumbled 10 basis points, to 4.93 percent.

Weekly national mortgage survey
Results of Bankrate.com's Aug. 12, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed15-year fixed5-year ARM
This week's rate:5.67%4.93%4.93%
Change from last week:+0.02-0.04-0.10
Monthly payment:$954.53$1298.80$878.71
Change from last week:+$2.09-$3.43-$10.07

ARM gets a leg up

The fractured relationship between 30-year fixed mortgage rates and the 5/1 adjustable-rate mortgage finally is on the mend.

ARM rates -- which remained stubbornly higher than fixed rates for most of last winter -- began a steady descent in early spring and now have sunk 74 basis points below their 30-year, fixed-rate cousin.

Does that mean ARMs deserve a second look after years of being out of favor?

Dan Green thinks so. The author of TheMortgageReports.com recently wrote that today's ARMs can be big money savers for certain types of homeowners, including those who plan to move within the next seven years.

"ARMs are not always bad," says Green, who is also a loan officer with Waterstone Mortgage in Cincinnati. "Just ask the homeowners whose conforming ARMs are adjusting lower right now."

Mortgage consultant Michael Becker agrees. Much of the negative press surrounding ARMs in recent years focused on subprime ARMs and negative amortization ARMs, he says.

Meanwhile, the potential virtues of a good old-fashioned prime ARM went unsung, says Becker, who works for Green Pastures Mortgage & Finance in Lutherville, Md.

Becker knows those advantages firsthand. His own mortgage is an ARM based on the six-month LIBOR rate, with a margin of 2.25 percent.

"The six-month LIBOR is around 1 percent currently, so when my rate adjusts it will be 3.25 percent," he says. "Not bad for a mortgage rate."

Proceed with caution

Not everyone is sold on the wisdom of an ARM in today's climate.

Dick Lepre, senior loan officer at Residential Pacific Mortgage in San Francisco, says he is torn between those who laud ARMs and those who fear them.

"This is one of those 'I feel very strongly both ways' topics for me," Lepre says.

Traditionally, borrowers have enjoyed lower borrowing costs when they forsake the certainty of a fixed-rate mortgage for the risk -- and possible reward -- of an adjustable-rate loan, he says.

"ARMs have almost always proven to be a better choice in the long run when compared with fixed," he says.

However, today's circumstances are conspiring to undermine the ARM's advantages, he says. For starters, many homeowners who would benefit from an ARM cannot get one "because their (home) values, income or both have dropped," Lepre says.

More significantly, the Federal Reserve's recent "enormous expansion in money supply" and the looming prospect of large fiscal deficits have created inflation fears that could drive long-term interest rates higher for "a prolonged period of time," Lepre says.

If rates do soar, homeowners with ARMs easily could find themselves with a mortgage rate that adjusts much higher later, leaving them trapped in a cycle of escalating payments for years to come.

"When rates are high, your options are gone," Lepre says. "You can't say, well, now I'd like to go back after five years and get the (fixed-rate) loan that I didn't get five years ago."

Lepre acknowledges rates may stay lower if inflation fears prove unfounded. Still, he urges homeowners who choose an ARM to do so with their eyes wide open.

"If you're going to make the decision of ARM or fixed, you better be prepared to live with the consequences," he says.

Use Bankrate's "Mortgage loan-to-value calculator" to find out your home's LTV ratio.

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