The current mortgage market's combination of favorable rates and terms is pushing thousands of consumers to ask three big questions:
Should we dis-ARM, re-ARM or grab a strong-ARM?
Should we lock up the lowest-priced conventional fixed rates -- the 15-year variety -- or hang loose with 30 years?
Should we, after years of shunning government programs, take the plunge and sign up with Federal Housing Administration and Veterans Administration?
The answers to all three depend on your personal financial profile, as well as your degree of belief that the age of disinflation is here for years to come.
The dis-ARMing, re-ARMing and strong-ARM alternatives are particularly intriguing at the moment (ARM stands for adjustable-rate mortgage). In markets across the country, the one-year "rate-capped" ARMs available from lenders represent the lowest-cost, standardized home loans that the American market has seen since 1978. Rates of 9 1/4 percent to 9 3/4 percent are the nationwide norm, with one to three "points" at closing. (A point is equal to 1 percent of the mortgage amount.) Conventional, fixed-rate loans, by comparison, are hovering at 2 percentage points higher.
Signing up for one of this season's one-year, 9-percent-range adjustables is known as going the strong-ARM route. The "strong" comes from the fact that, in comparison to earlier generations of ARMs, 1985's standard adjustables carry rate caps limiting potential or future increases to either one or 2 percentage points a year, with a maximum of 4 to 5 percentage points over the life of the loan.
Not only do they come with the lowest average rates on ARMs since 1980, but they have consumer-protection bells and whistles to boot.
The dis-ARMing alternative offers a different view of today's choices. Lenders in major markets report that part of the strong demand they're seeing for fixed-rate mortgages comes from homeowners who are arriving at rate-change points on their adjustable loans. Rather than staying with their mortgages -- at lower rates than they started -- these consumers are shedding their ARMs and opting for fixed rates.
Borrowers who signed up for attractively priced 12 1/2 percent, three-year ARMs in l982, for example, have been shifting to long-term, nonadjustable mortgages this summer. The three- and five-year ARM quotes available from their lenders have only been slightly lower than the 11 1/2 percent quotes available for fixed-rate conventional loans.
These borrowers have asked: Why take a flier on future rate jumps for so small a rate differential? Better to dis-ARM, they've decided, and get into something that provides more peace of mind.
Re-ARMing, by contrast, involves dis-ARMing with a twist. Rather than switching to fixed-rate mortgages, buyers are opting for 1985-model strong-ARMs. Take the case of a young couple who bought their first home four years ago with a graduated-payment adjustable in the subsidized 9 percent range. Their phased-in interest charges have now hit 14 percent. (The graduated-payment plans on tens of thousands of new houses in that tough housing era offered deep discounts for the start-up year. The graduated-payment formula, however, then began a series of scheduled annual escalations on the way to 14 and 15 percent maximum rates during a five-year span.)
The best fixed-rate options in this month's market also deserve attention:
FHA and VA mortgages, once the pariahs of the home-loan field, may well be the lowest-rate bet for buyers of moderate-cost houses with low down payments. FHA and VA mortgages are in the 11 to 11 1/2 percent range in most markets (plus 3 to 4 points), and require down payments ranging from zero (VA only) to just under 5 percent (FHA). Best of all, these fixed-rate, government-insured loans are still fully assumable -- a valuable feature if rates escalate in later years when you want to sell.
Fifteen-year conventional, fixed-rate loans are at 11 to 11 1/2 percent in many markets -- a full one-half percentage point below the 30-year loans on the same lenders' shelves. The monthly payments may be $100 or so higher, but you'll own your real estate free and clear twice as fast. Better yet, you can be certain that the economy -- or your lender -- never again will twist the rate on your ARM.