Home­own­ers feel pinch of mort­gage rate; in­ter­est rise proves costly

The Washington Times Weekly - - National - By Tom Ramstack

Robin Vinopal de­cided to fol­low the ad­vice of a fi­nan­cial ad­viser five years ago when she bought a home in Kens­ing­ton, Md. with an ad­justable-rate mort­gage.

Now she wishes she had ig­nored his ad­vice.

“I just hit the first adjustment up, and it’s painful,” said Mrs. Vinopal, a di­rec­tor of op­er­a­tions for a Col­lege Park, Md. games man­u­fac­turer.

Like other bor­row­ers who tried to save on monthly pay­ments with an ad­justable-rate mort­gage (ARM) or in­ter­est-only loan, Mrs. Vinopal is find­ing that her pay­ments are ris­ing with in­ter­est rates.

ARM rates were lower by one per­cent­age point or more com­pared with the tra­di­tional fixe­drate mort­gages un­til about a year ago.

In­ter­est rates on ARMs change with mar­ket fluc­tu­a­tions but stay the same on fixed-rate mort­gages.

Al­though ARMs­makeup25 per­cent of home loans na­tion­wide, they ac­counted for 42 per­cent of mort­gages last year, ac­cord­ing to the Mort­gage Bankers As­so­ci­a­tion, a trade group for mort­gage lenders.

They hit a height of pop­u­lar­ity while in­ter­est rates were low dur­ing the hous­ing boom, when home own­er­ship hit a record 69 per­cent in 2004.

How­ever, in some cases the Amer­i­can dream was built on un­re­al­is­tic prom­ises of easy loan-re­pay­ment terms.

Now the easy part of the loan is over as ris­ing in­ter­est rates cre­ate big­ger monthly pay­ments.

“A lot of th­ese bor­row­ers are go­ing to re­fi­nance into a new­mort­gage at this point,” said Mike Fratan­toni, Mort­gage Bankers As­so­ci­a­tion se­nior econ­o­mist.

Sixty per­cent of subprime loans, in­clud­ing some ARMs, are sched­uled to have their in­ter­est rates re­set by the end of the year, ac­cord­ing to the com­mu­nity ac­tivist group As­so­ci­a­tion of Com­mu­nity Or­ga­ni­za­tions for Re­form Now (ACORN).

Typ­i­cally, ARM mort­gages re­quire the same pay­ment for the first one, three or five years, then re­set each year to re­flect the most re­cent in­ter­est rates.

In­creases in in­ter­est rates “pose a huge threat to the se­cu­rity of in­di­vid­ual home­own­ers and en­tire neigh­bor­hoods,” ACORN said in a re­port on the risk subprime mort­gages cre­ate for low- and mid­dle-in­come house­holds.

Mort­gage lenders say they al­ready are see­ing their ARM cus­tomers re­turn­ing to re­fi­nance.

“I’m get­ting a ton,” said Do­minic Turano, Wash­ing­ton branch man­ager for Wells Fargo Home Mort­gage, one of the na­tion’s largest mort­gage lenders. “Peo­ple have pay­ments that have about dou­bled over the last two to two-and-a-half years.”

A three-year ad­justable-rate mort­gage for a $200,000 loan taken out in 2003 at a4 per­cent rate would in­cur monthly pay­ments of $955. If rates that in­clude the lender’s profit stay around the cur­rent 7.6 per­cent level, the monthly pay­ment would rise to $1,375, or 44 per­cent higher.

This month, Mrs. Vinopal re­ceived a let­ter from her mort­gage com­pany say­ing her monthly pay­ments would rise $250 over the roughly $800 a month she has been pay­ing.

“With my own lack of con­sumer aware­ness, I didn’t pay a lot of at­ten­tion to the rea­sons be­hind it,” said Mrs. Vinopal, who said she was merely seek­ing the low­est loan pay­ment pos­si­ble when­she took out the ad­justable-rate mort­gage. “At the time, it sounded good.”

If she knew how much the monthly pay­ment would in­crease, “I would never have signed up for that in the be­gin­ning,” she said.

Mrs. Vinopal and her hus­band, a Ge­orge­town Univer­sity bi­ol­ogy pro­fes­sor, are scram­bling to re­fi­nance with a fixed-rate mort­gage.

Thirty-year fixed-rate mort­gages av­er­aged 6.52 per­cent in­ter­est two weeks ago, ac­cord­ing to mort­gage in­vestor Fred­die Mac’s weekly rate sur­vey. A year ago, they av­er­aged 5.80 per­cent.

Five-year Trea­sury-in­dexed hy­brid ARMs av­er­aged 6.18 per­cent twoweeks ago. They av­er­aged 5.34 per­cent last year at this time.

Bor­row­ers with in­ter­est-only loans and op­tion ARMs run the great­est risk of higher pay­ments. In­ter­est-only loans al­low bor­row­ers to pay only the in­ter­est on their loans for the first five years or so. Op­tion ARMs al­lowthem to choose be­tween mak­ing a min­i­mum pay­ment each month or pay­ing down the prin­ci­pal, just like a credit card.

The risk that the re­quired monthly pay­ments will ex­plode prompted the Fed­eral Re­serve to warn mort­gage lenders to tighten their lend­ing stan­dards.

“Ev­i­dence in­di­cates that the most re­cent bor­row­ers into the mar­ket had lit­tle to no down pay­ment, mean­ing they have lit­tle or no eq­uity in their homes,” said Keith Leggett, se­nior econ­o­mist for the Amer­i­can Bankers As­so­ci­a­tion. “As their ad­justable-rate mort­gages re-price, they will ex­pe­ri­ence sticker shock. This in­creases the prob­a­bil­ity of them de­fault­ing on their mort­gage.”

The num­ber of prop­er­ties en­ter­ing fore­clo­sure was 17 per­cent higher in June 2006 com­pared with one year ear­lier, the on­line mar­ket­place for fore­clo­sure prop­er­ties Real­tyTrac said in its most re­cent re­port on fore­clo­sures.

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