A Tidier Way To Borrow

Fixed-Rate Mortgages Regain Popularity As Adjustables Prove Too Unpredictable for Many

Fred Wixson, with his wife, Liz, and son, Charlie, refinanced five years ago from a fixed-rate to an adjustable loan to save money for improvements on their Alexandria house, to buy cars and to pay off his student loan. The loan payments have been interest only, and he plans to refinance before the rate resets. (By Richard A. Lipski -- The Washington Post)

Stan Powell recently ditched his adjustable-rate mortgage for a traditional and far more predictable loan that would lock in his rate for 15 years.

"I figure I have about 12 years left before I retire, and it made sense to switch while rates are this low," said Powell, 55, who lives near Charlottesville. "I did not foresee rates going below where they are now anytime soon."

Mortgage shoppers are experiencing what one financing expert calls a "natural squeamishness" when it comes to nontraditional loans, specifically adjustable-rate mortgages that have been closely linked to a recent surge in foreclosures nationwide. Like Powell, many are rediscovering the appeal of fixed-rate mortgages, with monthly payments that stay the same for the life of the loan.

"Clearly, consumers are frightened by the headlines," said Doug Duncan, chief economist for the Mortgage Bankers Association. "There's no question there's a shift in consumer attitudes and actions. More people are applying for fixed-rate mortgages."

Picking between fixed- and adjustable-rate mortgages is one of the biggest decisions borrowers make, and many consumer advocates welcome the shift. They say that while fixed-rate mortgages may not be a good fit for everyone, they are a sensible choice for most borrowers, especially given today's relatively low interest rates. Having predictable monthly payments enables homeowners to better plan their budgets, insulate themselves from shock should interest rates rise and ultimately build wealth.

"It may not be the sexiest way to build wealth and save money, but for many people, it's the most effective," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.

In recent months, adjustable-rate loans have accounted for about 20 percent of all mortgage applications, after peaking at 36 percent during the height of the housing boom in early 2005, according to the mortgage bankers group.

These loans generally carry lower interest rates than fixed-rate loans written at the same time. But the adjustable loans can go up (or down) as interest rates change. Adjustable-rate loans first became popular in the 1980s, when interest rates soared and few could afford to commit to fixed-rate mortgages.

They had another burst of popularity in recent years as housing costs climbed and would-be home buyers stretched for any savings they could find. Recent loans frequently carried particularly low introductory "teaser" rates that are now rising sharply, which is one reason more people are falling behind on their payments.

The higher interest charged on fixed-rate loans reflects the added risk such loans pose for lenders, said Brent Ambrose, a real estate professor at Pennsylvania State University. With fixed loans, lenders bear the risk of financing a mortgage that borrowers can then refinance without penalty if rates go down, he said. With adjustable loans, borrowers bear the risk of rates going up in the future; lenders entice them with lower introductory rates.

But the gap between the rates on fixed and adjustable loans has narrowed dramatically in recent months, yet another reason for the shift away from adjustable loans, said Greg McBride, a senior financial analyst at Bankrate.com, a personal finance Web site.

Five years ago, on a typical $300,000 mortgage, a borrower with a 30-year fixed-rate mortgage would have paid $350 more a month than the borrower with a five-year, adjustable-rate mortgage, McBride said. Today, the borrower with the same fixed-rate loan would pay only $50 more.