With home mortgage rates now hovering at their lowest levels in six months, spring home buyers are confronting a common, mind-bending conundrum:
* Do we sign up for a 30-year or 15-year fixed-rate loan at 12 1/2 to 13 percent, locking in those rates before they rise later in 1985?
* Or do we hook on to one of the discount-rate adjustables that lenders have begun pushing again to lure consumers from fixed-rate loans?
Those questions were relatively easy to answer from the spring to fall buying season of 1984. Fixed rates were at 13 3/4 to 14 1/2 percent. Adjustables typically were 2 to 3 points lower. More than two-thirds of all new purchasers and refinancers opted for adjustable-rate packages. Fixed rates were for the fainter-hearted few.
Now those proportions have shifted dramatically. National data from the Federal Home Loan Bank Board and lending trade groups suggest that buyers switched back strongly to fixed rates. More than one-half of new mortgage loans originated in December and January carried fixed rates, according to statistics compiled by the bank board, the regulatory agency for a major segment of the mortgage industry.
Lenders in some markets report that adjustables have been tough to sell in February, even among younger, first-time buyers who are their prime targets.
The mass movement to fixed-rate mortgages in 1985's lower-rate environment is easy to understand. But it's also ironic. Some of the 13 percent mortgages that consumers are snapping up simply are not such good deals compared with adjustables.
To the contrary, savvy buyers and refinancers who shop their local markets and have access to computer-assisted mortgage analysis programs are finding that cut-rate adjustables may be superior to fixed-rate loans -- even under the worst economic scenarios for the coming decade.
Put another way: Certain adjustables carry the right combination of discounted rates, annual-rate-increase caps and life-of-the-loan ceilings to guarantee home buyers a lower rate for the average loan life than virtually any fixed-rate alternatives.
But how do you know which adjustables are the true bargains and which are the clunkers?
You have to strip down adjustable-rate packages into their working, movable parts. Then you have to put any loan you're considering to the time test: How does it perform if rates shoot up during the next several years? How does it treat you if rates in the economy overall decline steadily? How does it stack up if rates stay roughly the same for the balance of the 1980s?
The key adjustable features that will determine what you'll get out of a particular loan include:
* The depth of initial rate discount.
* The existence and size of rate caps (ceilings) that prohibit increases beyond a specified amount annually and for the duration of the mortgage.
* The rate index used by the lender.
* The "margin" -- the 2 to 3 percentage points of extra charges tacked on to the basic index rate by the lender for profit and overhead.
* The frequency of the rate adjustments.
If you're not a computer buff and don't want to become one quickly, you can provide your adjustable-rate-loan data to a mortgage-analysis service and get quick answers at nominal fees. One Maryland-based firm that has developed mortgage-analysis computer software, Loantech Inc., will tell you how any specific cut-rate adjustable pencils out under different economic scenarios for the future.
Let's say you have the opportunity to sign up for either a 13 percent fixed-rate home mortgage this month, or pick any one of three different one-year adjustables -- each with different rates and features.
Feed the details on your adjustables by phone or letter into Loantech's computer. Printouts tell you where your monthly payments, effective rate and principal balance will be with each loan, year by year over the next five years, if rates stay where they are, rise by an average of 2 percent every year, or drop by an average 2 points a year.
A recent computer analysis by Loantech of several discount-rate adjustables produced intriguing results:
* A one-year, $80,000 adjustable mortgage with a first-year rate of 9 3/4 percent, a 2 percent annual rate cap and a 5-point, life-of-the-loan cap guarantees you a lower average rate over the next five years than a 13 percent, fixed-rate loan even if rates in the economy overall shoot to 20 percent. If rates recede, on the other hand, the adjustable could bring you under 8 percent by the late 1980s. At no time between now and 1990 would your rate or monthly payments equal or exceed the fixed-rate mortgage.
* Seemingly attractive, rate-capped adjustables, on the other hand, can give you problems. A 10 1/2 percent, $80,000 adjustable mortgage with a 6-point life-of-the-loan cap and a 2 3/4 percent annual margin could zip you to 16 1/2 percent by 1989 -- despite its limits on rate increases.
With that sort of combination of adjustable features,, a 13 percent, fixed-rate loan in 1985 would be the better choice, Loantech executive Carol Ginsburg said.