With Home Loan Market in Flux, Paying Points Is Golden For Many

Current stresses in the home loan market have changed the ground rules for borrowers in many ways.

To see how those changes are affecting mortgage pricing, I did some online loan shopping. I compared prices for conforming loans of $400,000 that can be purchased by Fannie Mae and Freddie Mac, and $800,000 (jumbo) loans that cannot. Within each size class, I looked at 15- and 30-year, fixed-rate mortgages and 5/1 adjustable-rate mortgages (ARMs).

I obtained prices from 11 lenders on Dec. 12. To assure comparability, I posed as a prime borrower purchasing a single-family house in California with a large down payment, while fully documenting my income and assets. What I learned probably holds for nonprime transactions, but you can never be entirely sure.

· Price differences: The range of prices quoted by different lenders was extremely wide. On the popular 30-year, conforming, fixed-rate loan, on which spreads usually are the smallest, the highest quote was more than 1 percentage point above the lowest quote. On ARMs, the spreads were even larger. On a 5/1 jumbo ARM, one lender quoted 8.125 percent plus $9,800 in points, while another quoted 5.75 percent with zero points.

Bottom line: Borrowers can save a ton of money by shopping around among loan providers.

· Conforming ARMs: One striking thing about the current market is that conforming ARMs cost more than 30-year, fixed-rate loans, something I cannot remember ever having seen before. The rate difference between the 30-year fixed and the 5/1 ARM, holding points constant, was almost 1 percentage point. Furthermore, 3/1 and 7/1 ARMs were priced higher than the 5/1s. However, all the lenders, except one, offering jumbo loans priced ARMs below the 30-year, fixed-rate loans, which is the usual pattern.

Bottom line: There is no reason for a borrower to select a conforming ARM; but on jumbos, ARMs continue to enjoy a significant rate advantage.

· 15-year, conforming, fixed-rate mortgages: The 15-year, fixed-rate loan has always been my preferred instrument for borrowers who could afford the payment, because it carried a significantly lower rate than the comparable 30, and it amortized much more rapidly. On jumbo loans, the spread remains very attractive at about 5/8 percentage points; but on conforming loans, it has dwindled to about half of that.

Bottom line: There's no reason to avoid 15-year, fixed-rate loans, but on conforming loans the advantage is not what it was.