If you plan to buy or sell a home in the next five years, you ought to know the hard, cold truth about the controversial new "adjustable-rate" mortgage coming your way from federally regulated lenders.
Hard, cold truth No. 1 is that despite all the public gnashing of teeth by Ralph Nader and others in the last two weeks, the new mortgages aren't likely to be anywhere near as scary for real estate as they believe.
Hard, cold truth No. 2 is that in some respects, the new mortgages will provide distinct advantages over what's currently available in the fixed-rate home-financing market. Strange as it may seem, six months to a year from now you may well find yourself seeking out adjustable-rate financing -- not avoiding it -- when you go to buy a home.
In a capsule, here are the facts about adjustable-rate home loans -- just in case you missed them in all the sound and fury that accompanied the Federal Home Loan Bank Board's adoption of revised mortgage rules in late April. The questions and answers are based on this writer's independent research into the likely forms the new loan will take in major real estate markets around the United States, and how the financing will affect housing sales.
question: Who's going to offer adjustable-rate loans, and when?
Answer: The majority of federal chartered S&Ls and savings banks in the United States are likely to switch to adjustable-rate loan forms between late spring and the fall of this year. Federally chartered banks, which are regulated by the controller of the currency, are also likely to plunge into the home market with adjustable-rate mortgages to a greater degree than they're involved at present with fixed-rate loans.
Question: Does the switch to adjustable-rate loans mean that there'll be no lenders offering traditional fixed-rate loans?
Answer: Many lenders will simply stop offering traditional long-term, fixed-rate loans, with the exception of FHA and VA-backed mortgages. However, in most markets you'll be able to find lenders willing to make a traditional fixed-rate loan -- but almost certainly at an interest rate one to three percentage points higher than the rate charged on adjustable loans.
Question: What forms are adjustable mortgages likely to take? What precisely will be adjustable by, how much, and when?
Answer: The bank board's regulations permit lenders to adjust interest rates on their new loans every 30 days -- according to a nationally recognized rate index -- but the likelihood is that very few lenders will choose to make adjustments that frequently. Most S&Ls and banks will probably choose rate adjustment periods of three or six months, for example.
Question: Will rate adjustments mean that the monthly payment has to change?
Answer: No, at least not right away. This is probably the least understood aspect of the adjustable-rate plan. Many lenders will guarantee consumers a fixed payment schedule for one to five years. A home buyer who begins with a $600-per-month principal and interest payment will be guaranteed the same payment for as much as five years, even through the interest-rate index governing his or her loan rises or falls during that period. At the end of the agreed-upon period, the payment plan will be adjusted -- up or down -- to reflect rate changes.
Question: Are there any real-estate markets where adjustable-rate loans already are widely offered -- and have achieved a high degree of acceptance by consumers?
Answer: Yes. In Winston-Salem, N.C., last September, the largest financial institution in the area, the Wachovia National Bank & Trust Co., introduced an adjustable-rate home mortgage plan that has not only been highly popular, but it likely to be one of the models for lenders around the U.S.
The "Wachovia Plan" works like this: Home buyers get a rate that is substantially lower than what's charged on fixed-rate mortgages (13 1/2 percent versus 16 percent currently). The adjustable-rate loans are for 30 years, with monthly payment adjustments (up or down) no more than once every five year. The underlying interest rate is adjusted according to a Treasury index every three months. The payment amount is increased (or decreased) after five years, and any upward change cannot exceed 25 percent. CAPTION: Graph, The Consumer Federation of American has made this comparison of the effects of four indexes on a $60,000 variable-rate mortgage, the type of instrument recently approved for use by savings and loan associations. The board recommended that lenders use these indexes to adjust mortgage loan contracts. The federation is using an example of a loan taken out in 1976 at an initial rate of 9 percent. It constructed a case in which the mortgage was tied to the actual index between 1976 and the present. Monthly payments were computed at six-month intervals. It showed that the increases in the original $483 monthly payment were $389 when tied to a three-month Treasury Bill rate; $377 tied to six-month T-Bill rate; $222 tied to the national average mortgage ratae, and $117 tied to the cost-of-funds rate. By Gail McCrory -- The Washington Post