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VOICES FROM THE INDUSTRY: Fixed-rate mortgage loans remain a relative bargain

March 13, 2006

Mortgage lenders have found all sorts of creative ways to get money into the hands of eager buyers, with interestonly, piggy-back and no-doc loans.

While these loans have provided opportunities to fund more house than ever, the opportunity to sleep peacefully knowing your payments are locked in place makes fixed-rate mortgages a desirable option for many homeowners these days.

Closing gap

Even with interest rates inching up, fixed-rate mortgages never looked better compared to adjustable-rate mortgages, or ARMs, and short-term loans. Smart home buyers have watched the market over the past year and a half and noticed the fixedrate mortgages have risen only slightly, while one-year ARMs are climbing more rapidly.

To compare: One year ago, 30-year mortgages averaged 5.62 percent; today they are hovering around 6 percent. One year adjustable-rate mortgages were 4.15 percent last year, while you'd pay around 5.6 percent now.

The result: a buyer's market. Now is a good time to purchase a new home and reap the benefits of a stable, fixed-rate mortgage. It's also a good time to refinance out of your adjustable-rate loans, interest-only loans and home equity lines of credit.

Adjustable-rate loans may benefit home buyers who plan to move within a few years or those who have set aside extra cash or investments that they could tap into if rates climbed significantly. However, when adjustable rates are nearly equal to fixed rates, you have to consider the added security of predictable monthly payments.

Interest-only loans, which allow the borrower to repay only the interest in the first three to 10 years, are at risk when the interest-only term expires. At that point, you have to be able to afford the payments on principal. If not, you run the risk of defaulting on your mortgage.

Many homeowners have taken advantage of home equity lines of credit or second mortgages. As housing values rose, so did their homes' equity, so it made sense to use that equity as leverage to secure a low-rate loan. With those loans, homeowners could pay for everything from college costs and home improvements to financing new businesses or second homes at a lower cost than with other types of consumer loans.

If you have a variable-rate loan, the interest rate can vary as the prime rate changes. This can affect the amount you owe monthly or affect the length of the loan. A fixed-rate loan, on the other hand, enables you to know what your payments will be and when your loan will be paid off.

Currently the market is experiencing an inverted yield curve with short-term rates higher than long term. Historically, this has indicated an impending recession, but times are different now.

Economy strong

Federal Reserve Chairman Ben Bernanke recently told lawmakers the economy is doing well, employment levels are strong, and no sharp drops are expected in housing values. Housing prices should still show moderate gains. Bernanke said rates at both ends of the curve are low by historic standards and should not be a drag on the economy.

The last time we had an inverted yield curve, in 2000, the U.S. equity market collapsed and sent the technology markets spinning. Corporations have learned from those events and are more cautious about spending and preserving their balance sheets.

Central Indiana, in particular, has an outstanding buyer's market, allowing purchasers to view several homes and negotiate the best price and terms.

Housing prices have risen, but at a much steadier pace than other parts of the country, such as the East and West coasts and the Sunbelt states.

The median home price in the Midwest was $170,000 in October 2005, which was 10.4 percent higher than the same period a year earlier.

Total housing inventory levels rose 3.5 percent at the end of October, to 2.87 million existing homes available for sale, which represents a 4.9-month supply at the current sales price, according to the National Association of Realtors.

Although existing-home sales fell 1.9 percent in the Midwest, sales were still 1.3 percent higher than a year ago.

In the end, all signs point to a balanced economy and a stable housing market that is particularly good for buyers right now. If you are looking for a new home, feel confident that you can find the home you desire and a mortgage that is right for you.



McGuire is president of Indianapolis-based Tucker Mortgage LLC, an F.C. Tucker company. Views expressed here are the writer's.
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