Buyers looking to adjustable rates for mortgages

NEW YORK -- With interest rates rising, many people think it's too late to get a good deal on a mortgage to buy new homes or refinance their current homes.

But there are many alternatives in the market to the traditional fixed-rate, 30-year mortgage that are offered at manageable rates, including adjustable-rate mortgages. And people with cash can make bigger down payments or pay discount points to get a better deal on fixed-rate loans.

After hitting a record low of 5.21 percent in mid-June, the average rate on 30-year mortgages has risen steadily to about 6.25 percent, according to the Freddie Mac mortgage company.

That's not a bad rate by historical standards and well below the average 8 percent of just three years ago. But it's risen enough to scare many families away. The Mortgage Bankers Association of America said Wednesday mortgage applications declined for a second consecutive week to the lowest level in more than a year.

"What is going on now is 'sticker shock,' and that will continue for a couple of months," said A.W. Pickel of Lenexa, Kan., president of the National Association of Mortgage Brokers. "Then, I think, people will figure out that 6.25 percent is a pretty good interest rate -- and that they have alternatives."

'Ahead of the game'

Michael Geretano, 54, vice president of a security company, is in the process of refinancing the mortgage on his Fort Salonga, N.Y., home.

"I missed the lowest interest rates because I kept waiting for them to go lower, and I waited too long," he said.

So he's found a "hybrid" 5-1 adjustable-rate mortgage from online lender Quicken Loans. With the hybrid, he'll get a 5 percent interest rate locked in for the first five years of the mortgage. Then the rate can be adjusted annually, but the increase is capped at a maximum of 2 percentage points a year and no more than 5 percentage points over the life of the loan.

"My current mortgage is 7 percent, so I'll definitely be ahead of the game for the first five years" with the new mortgage, he said. "In the sixth year, even with a maximum adjustment, I'm looking at where I am now."

Bob Walters, chief economist at Quicken Loans in Livonia, Mich., said that as rates have risen, more customers are considering mortgages that have fixed rates for three, five or seven years and then are adjustable.

He said a couple taking a hybrid 5-1 mortgage of $200,000 at 5.25 percent instead of a fixed-rate, 30-year mortgage at 6.75 percent would save about $3,000 a year in interest payments, or $15,000 in the first five years.

"The parents of a lot of first-time home buyers tell them, take the 30-year fixed for the security, but they don't take into account that they pay a premium for that," Walters said. A young couple, he said, "has children, gets raises, their jobs move them and they're not going to be in that starter bungalow five or six years from now."

Still, there are people who want to stay with fixed-rate mortgages. HSH Associates, which publishes mortgage data, notes that higher rates don't necessarily price a family out of the market.

"A one-half percent rise, from 5.5 percent to 6 percent, is only a $32 per month increase for a $100,000 loan," it said.

A family can also get a lower rate on a fixed-rate mortgage by selecting a 15-year term instead of 30 years or by making a larger down payment. Or they can pay discount points, the equivalent of 1 percent of the loan, HSH Associates said. Each point that is paid upfront should lower the interest rate by between an eighth and a quarter of a percentage point.

Gauge length of stay

David Lewis, executive vice president of the online bank ING Direct in Wilmington, Del., said people should consider matching the terms on their mortgages to the length of time they expect to stay in their houses.

"People spend far less time in their house than they think they will," Lewis said. "The average these days is seven years, and for many it's less than that."

Ryan Sysko, 29, refinanced his home in Wilmington seven months ago, changing from a 30-year, fixed-rate mortgage at about 8 percent to a 5-1 adjustable-rate mortgage from ING Direct with a starting rate of 4.875 percent.

Sysko, who works for an insurance marketing agency, said the adjustable-rate mortgage made sense for him and his wife, Leslie, because they don't plan to stay in their town home for longer than five years. They're expecting their first child this month and would like to move eventually to a house with a yard in the suburbs.

"No one stays in the same job for 30 years like my parents and grandparents, and no one stays in the same home for 30 years," Sysko said. "For us, knowing that this wasn't going to be the house we stayed in forever, a long-term mortgage didn't make sense."