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| The Basics | Mortgage rates hit 18-month high
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Bankers say applications are down, but more homeowners refinancing ARMs as gap with fixed loans narrows. Current 30-year rate of 6.37% is still well below historical norms, though.
By Bankrate.com
Mortgage rates have gone up for the eighth week in a row, and a growing number of loan applications are for refinancings as homeowners try to bail out on adjustable-rate loans..
The benchmark 30-year, fixed-rate mortgage rose 13 basis points to 6.37%, 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 0.33 discount and origination points. One year ago, the mortgage index was 5.72%, and four weeks ago it was 6.07%. In early September, before this eight-week streak began, the 30-year averaged 5.8%.
The last time 30-year, fixed rates were this high was nearly 18 months ago, on May 12, 2004, when the benchmark rate was also 6.37%.
The benchmark 15-year, fixed-rate mortgage rose 12 basis points, to 5.91%. The benchmark 5/1 adjustable-rate mortgage rose 8 basis points, to 5.9%.
Has the market turned?
Fewer people are applying for home loans, but apparently not only because of rising rates. According to the Mortgage Bankers Association, mortgage applications were down 4.8% last week compared to the previous week and down 15.2% compared to the same week last year.
"This decline is consistent with our expectations of a softening from the record level of new-home sales during the first three quarters of 2005," says Doug Duncan, the mortgage association's chief economist. .
Related news and commentary on MSN Money
For months, economists have been predicting that 2005 would be a record year for new-home sales, but that they would decline in the last three months of the year. It's too early to say for sure whether that's happening yet, but the small decline in mortgage applications provides a hint.
Weather might have played a factor, too. The association did not estimate the impact of Hurricane Wilma, which plunged most of South Florida into darkness and, doubtlessly, caused delays in mortgage applications.
Homeowners dis-ARMing
Even as rates have risen, applications have remained strong for refinanced mortgages. More than 40% of applications are from homeowners who want to refinance. Why are so many people refinancing when the average rate on a 30-year fixed has risen a quarter of a percentage point in a little over a month?
"I think the big answer is rates are still low, from a historical perspective," says Jim Svinth, executive vice president, capital markets for LendingTree. "A mentality with borrowers, particularly when they see rates increase from a low level, is, 'This is it. If I'm going to refinance, I'd better do it.'"
Svinth theorizes that some homeowners are switching from adjustable-rate mortgages to fixed-rate home loans, a practice that other bankers have called "dis-ARMing." To understand why people do this, consider what has happened, since the beginning of the year, to the 30-year fixed and to the most popular ARM, the 5/1 hybrid.
In early January, the average rate on a 30-year fixed was 5.76% and the average rate on a 5/1 ARM was 5.08%. Since then, the rate on the 30-year has risen 59 basis points, while the rate on the 5/1 ARM has gone up 74 basis points. ARM rates have climbed faster than fixed rates, so people are motivated to dis-ARM.
Monthly payments on a fixed $165,000 30-year loan taken in January would have been $963; the same loan today would be $1,028. But a 5/1 adjustable-rate loan has risen even more, from $893 to $978.
People are almost surely taking a higher rate when they switch from an ARM to a fixed-rate loan. But they don't have to worry about the rate rising in the future. Anyway, Svinth says, "6%, 6.25% is still a smoking deal, by historical standards."
That assertion is hard to argue with. In Bankrate's mortgage surveys, the average rate on a 30-year fixed was 7.46% in 1999; 8.08% in 2000; 7.01% in 2001; and 6.55% in 2002. The annual average was below 6%in 2003 and 2004 and has been 5.85% so far this year -- but that happy streak of rock-bottom rates looks to end in 2006.
-- Holden Lewis
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