THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, January 28, 1995 TAG: 9501260293
SECTION: REAL ESTATE WEEKLY PAGE: 04 EDITION: FINAL
TYPE: COVER STORY
SOURCE: BY JEANNE MOONEY, SPECIAL TO REAL ESTATE WEEKLY
LENGTH: Long : 179 lines
OK, Mr. and Ms. Homebuyer, so the days of rock-bottom interest rates passed you by.
And now you're afraid rates are headed up, what with the itchy-fingered inflation fighters at the Federal Reserve trying to rein in economic growth.
So what will you do?
Save your pennies and wait for another remarkable moment in home financing?
Don't, say a host of lenders who serve South Hampton Roads. Shop around instead, they advise.
Savings and loan associations, mortgage companies and banks are all battling for borrowers.
``It's almost like gas wars,'' says P. Thomas May, president and chief executive officer of First Virginia Bank Mortgage Co. in Falls Church, a subsidiary of First Virginia Bank of Tidewater. ``There's been a lot of competition to stay alive.''
And to entice you, lenders are offering a wide and sometimes creative array of ``products,'' or mortgages. One just might fit your budget and lifestyle.
What's out there?
For starters, enough buzzwords, acronyms and minutia to make your head spin. But as you research the options, you may find yourself comfortably sputtering about negative amortization and lifetime caps, terms you once thought reserved for the glossaries of mortgage manuals.
Warning: Keep after this study of numbers and nomenclature and you'll quickly sift the real estate wonks from your normal friends.
Now about those mortgages . . . They come in many flavors.
If vanilla suits your taste, there's always the 30-year fixed-rate mortgage. Interest rates for them range around 9.25 percent.
If you're looking for a lower starting rate and are willing to brook some risks, there are adjustable rate mortgages, or ARMs. They are the spumoni of the mortgage market. With an ARM, borrowers can lock in an interest rate for one, three, five, seven or 10 years, to name but a few terms.
Generally speaking, shorter terms carry lower interest rates. After the term expires, the interest rate and the borrower's monthly payment rise or fall periodically based on the ups and downs of a governing index, such as the one-year Treasury bill.
The interest rates typically hover 2 to 2.75 percentage points above the index, a spread lenders call the margin.
Many ARMs amortize over 30 years. But Columbia National Mortgage Corp. will amortize the costs of an ARM over 40 years.
``I consider it unique,'' says Doug Huston, vice president and area manager in Columbia National Mortgage's Virginia Beach office. ``It's targeted for people who simply need to get their payments down a little more.''
Someone who buys a $150,000 home would pay about $47 less a month in principal and interest in the first 10 years of a 40-year note than they would with a 30-year note. That scenario presumes the borrower would put 5 percent down and therefore borrow $142,500. It also presumes a 9 percent starting interest rate in a 10/1 ARM (fixed rate for 10 years, adjusted annually thereafter), which Columbia National offers.
One other caveat: Someone who retires a 40-year mortgage will make 120 more monthly payments than someone who retires a 30-year note.
What's the best mortgage for you?
That depends on your situation.
If you fit the profile of the average homeowner, you will keep your mortgage six years. By then you might move, die or divorce.
Or perhaps by then the boffo interest rates of yore will be here again and you will refinance.
If so, an adjustable rate mortgage may be for you.
It was for Randall and Tracie Allen. They assumed a 5/1 ARM recently and bought a five-bedroom home on three acres in Chesapeake.
The Allens aren't the only ones taking up ARMs.
``It's an ARM market,'' says Gene McNeal, a vice president in the lending division of Life Savings Bank's Norfolk office. ``The ARMs have really proven to be better than the fixed-rate (mortgages) in some cases.'' Says Ken Dolan, an assistant vice president in the Chesapeake office of NationsBank and the Allens' lender, ``The five- and 10-year ARMs are just going like gang busters.
The Allens' mortgage locks in an interest rate of 7.875 for the first five years. The rate adjusts annually thereafter in sync with the one-year T-bill, the determining index for this loan.
The rate can rise or fall by no more than 3 percentage points in year six, by no more than 2 percentage points in year seven and after, and by no more than 6 percentage points over the life of the loan. The limits are respectively known as annual and lifetime caps.
The Allens are young - she is 26 and he is 32 - and still advancing in their careers as a registered nurse and civil engineer respectively. They liked the mortgage's low starting rate.
``It gets you into your house,'' Tracie Allen says. ``And it gets you into a better house than you would have had at a higher rate, so you don't outgrow it in the first five years.''
In five years, Allen expects her husband's salary to double, making any potential increase in interest rates and their monthly payments easier to handle.
But she and her husband think mortgage rates will fall by then instead. In five years, they hope to be shopping for a 30-year fixed-rate loan with a lower rate.
Lenders with long memories will tell you that today's interest rate on a 30-year fixed-rate mortgage is not so big or bad at all. They recall the end of 1980, when the prevailing rate nationwide hit 16 percent.
Yet, home buyers remember the heady days of a year ago when rates for a 30-year fixed-rate loan ranged around 7.5 percent. Lenders remember, too, and have tried to keep up business with creative offerings.
CitFed Mortgage Corp. of America is trying to wave in borrowers with the American Dream Loan.
The deal works like this: CitFed will pay the points, closing costs and origination fee on your 30-year loan if you put 5 percent down and pay 9.5 percent interest on the borrowed money.
The advantage? Home buyers spend less money up front, says Ken Kolodziej, division manager in CitFed's Virginia Beach office.
The disadvantage? The rate is about one-quarter percentage point higher than what many 30-year fixed-rate loans carry, he says.
``It is finding its niches in the market,'' Kolodziej says of the loan. The takers are a ``yuppie-type group'' with solid earnings but little savings, he says.
CitFed isn't the only outfit trying to sweeten the deal.
Many builders have long paid some of the closing costs to woo buyers, says Russell S. Heath Jr., associate vice president of the Tidewater Builders Association. They also have paid one-half to one percentage point on the mortgage.
``That's been a way of life in this market for many, many years,'' Heath says.
``People will be induced to buy a new home as opposed to a resale home if they don't have the money to pay for those items,'' says Heath, who is also area manager in Crestar Mortgage Corp.'s Virginia Beach office.
Eric D. Smith, a broker in the Virginia Beach office of Advantage Mortgage Co., offers this tip to mortgage hunters: check out COFI before you sign.
COFI is an acronym for the Federal Home Loan Bank Board's Cost of Funds Index, a slow moving economic indicator that lenders use to figure the interest rates of some ARMs.
COFI lags nearly 3 points behind the one-year Treasury bill, a popular index, Smith points out. In a rising market, a low, slow climbing index means a creep rather than a leap in adjustments for borrowers.
``If they are thinking about an adjustable rate mortgage, this is the only index to be tied to,'' Smith says. ``The index is going to be less volatile.''
COFI ARMs also afford qualified borrowers low interest rates to start. One COFI ARM starts with an interest rate of 5.95 percent and adjusts each six months, but by no more than 1 percentage point each period. The rate cannot exceed 11.95 percent over the life of the loan.
Another COFI ARM is less conservative. It begins at 4.875 percent. However, payments are adjusted annually while interest rates are adjusted monthly beginning in the third month. If the payments do not cover the increased interest costs, negative amortization occurs. In such cases, the owed interest is deferred and added to the borrower's loan amount.
Smith says this COFI ARM suits the more sophisticated buyers who have good control of their finances.
Of course, each home buyer must decide which mortgage is best. And they can do that with help from loan officers. So look around. See what the market offers.
``It's like buying a pair of shoes,'' says McNeal of Life Savings Bank. ``You have to find a program that fits you.'' ILLUSTRATION: LOAN RANGES
30-year fixed mortgage: More than 9 percent these days, which is
why you're looking for something better. But refinancing is
feasible should rates decrease.
ARMS: Adjustable rate mortgages, a very flexible way to finance a
house. Choose your interest schedule.
40-year-loans: Lowers your monthly payment but adds 120 payments
to the basic 30-year amortization. Total interest is more.
Points, closing fees paid: Regular interest rates but less money
up front. Ideal for those with good earnings, poor savings.
Sometimes the lender, sometimes the builder will offer this deal.
COFI loan: ARM interest is based on a Cost of Funds Index that
rises more slowly than the Treasury note indicator used by many
ARMs.
Negative amortization: If interest outpaces the payment schedule,
the amount owed is deferred and added to the loan amount.
[Cover]
[Color Photo]
JOSEPH JOHN KOTLOWSKI/Staff
Randall and Tracie Allen bought their Chesapeake dream home with a
5/1 ARM, which is one way to beat today's high mortgage rates. For
more about this and other options, see page 4.
by CNB