ARM Holders Would Do Well to Shop Around Now

By Nancy Trejos
Sunday, October 12, 2008

The global financial crisis has affected virtually every aspect of personal finance, from mortgages to student loans to credit cards to retirement savings. So it's no surprise that so many of our readers have so many questions.

Our first one comes from Luis Frank Torres, a 36-year-old attorney in the District. When Torres refinanced his Georgetown home in 2005, he got a five-year, adjustable-rate jumbo mortgage. (It's a jumbo because it's above $417,000. Until this year, government-backed lenders Fannie Mae and Freddie Mac guaranteed loans only up to that point. Their limit has temporarily been raised, though.)

Torres's adjustable made sense at the time because the interest rate was so low -- 5.375 percent. He loves the four-bedroom house, which he bought in 2004, and has no problem making the payments. "The mortgage fulfilled its purpose at the time," he said. "I think that rate I got was a very good rate, especially compared to what I'm seeing now."

Now, as he watches the housing market crumble, lenders tighten their standards, and mortgage rates rise and fall, he wonders: What will happen when he has to refinance in 2010? Will the interest rate be sky-high? Will there still be a credit crunch, which has led banks to hoard their money? Will jumbo loans, which have been so hard to get because Fannie Mae and Freddie Mac wouldn't back them, still be as expensive as they have been lately?

"I hope those conditions don't worsen," he said.

While it is impossible to predict where mortgage rates will be in two years, it wouldn't hurt Torres or anyone with an ARM to start shopping around now, advisers said.

Rates are still much better than they were in the 1980s. This week, rates on longer-term fixed- and adjustable-rate mortgages actually fell as investors fled to the relative safety of bond markets, Freddie Mac reported in its weekly survey.

"The best thing to do is talk to three or four reputable banks and see what their options are," said Domenic DiPiero, president of Newport Capital Group in Red Bank, N.J.

If Torres can find a decent rate now for a 30-year-mortgage, DiPiero suggests jumping on it. "An ARM is really a gamble on interest rates," he said.

The advisers warned, however, that if Torres's property has depreciated below what he owes, he should forget about refinancing for now.

Torres and others facing this dilemma should also keep in mind that they will need very high credit scores -- we're talking 750 -- to get decent rates, said Guy Cecala, publisher of Inside Mortgage Finance.

In a city as expensive as Washington, there is one more thing to factor in. From now until the end of the year, the Federal Housing Administration and Fannie Mae and Freddie Mac will guarantee mortgages up to $729,750. Congress included that provision in the economic stimulus package passed in February as a way to unclog housing markets in expensive areas. Because they had not been backed by a government entity, lenders had to either hold them in their portfolios or sell them to private investors, which meant previously that lenders didn't want to bother with them.

So, Cecala said, if the balance of Torres's loan is below that, he could get a lower rate now than he probably would after December.

However, other government actions could lead to lower rates next year, Cecala said. The just-approved bailout plan allows the government to buy up the bad assets that have been keeping banks from lending. So in theory, once the plan really kicks in, banks will loosen their mortgage underwriting and offer lower rates, he said. Repeat: in theory. "I hope to God we're in better shape in 2010 than we are now," Cecala said.

Don't we all?

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