The final four weeks of 1987 are shaping up as a super mortgage-money shopping season, particularly for bargain-hunting move-up buyers and refinancers. Other than the weeks just before 1987's 2-percentage-point spring rate jump, December offers the best environment of the year for heads-up consumers:
Buoyed by rate-cutting in Europe and the Federal Reserve's easy-credit policy, interest rates in the economy continue to flutter downward. The Fed wants no post-Wall Street crash recession laid on its doorstep and is prepared to keep rates low.
Mortgage volume has gone into its seasonal slumber, with consumers dreaming of sugarplums and office parties rather than home-loan applications. To counter end-of-the-year blahs, aggressive loan-production officers at thrift institutions and mortgage banks have deals that will be gone in 1988.
Adjustable-rate mortgages are the focus of the heaviest discounting and deal-making nationwide. Yet of all the mortgages in this holiday season's money bazaar, ARMs require the closest attention to detail, the sharpest eye on the part of the borrower.
Based on a telephone sampling of lenders in major metropolitan markets last week, here are a few practical pointers for ARMs-sale aficionados before Christmas. They include consumers letting their fingers do the walking through the mortgage listings in the Yellow Pages, as well as buyers and realty brokers evaluating "rate sheet" promotions from local lenders.
For starters, try something different: Don't even look at the posted rate on a single-digit adjustable "bargain" until you've checked out what's underneath the glossy exterior. Look at its "margin" first. Unlike the initial rate on the loan (which will change), the margin is something you'll be stuck with, perhaps for years.
The margin is the "spread" or extra charge the lender tacks on the basic index rate governing the mortgage. Let's say the index happens to be one-year Treasury securities, and it's 7 percent when you nail down the loan. Putting aside the discount "teaser" initial-rate period the lender pulled you in with, your future monthly payments are going to be determined in part by the margin.
If the margin is "fat" and "juicy," as some lenders refer to it, you're going to pay more. If it's thin, you pay less. The thinnest margin you'll generally find this season is 2 percentage points. Anything under that is strictly from Santa. Margins of 2 points are most commonly found on adjustables with short rate-change periods -- anywhere from monthly to once every six months.
If you find a one-year adjustable with a 2-point margin, you're well into bargain land. If you find a three-year adjustable with a 2-point margin, pinch yourself and listen for jingle bells.
More typically, you'll be staring at the reverse: a season's-greeting teaser rate -- say 6 7/8 or 7 percent on a one-year ARM -- with a 3-point margin tied to Treasury bills. Assuming the best, your next year's rate easily could be l0 percent. Assuming the worst, with no protective caps, you could be well into double digits.
The most common margins nationwide this month are in the 2 1/2 to 2 3/4 percent range. In themselves, they represent no bargains. Anything below 2 1/2, on the other hand, may be part of a bona fide special.
Some other signs of a good deal in a new ARM:
Low "caps" or rate ceilings, both year-to-year and life-of-the-loan. If you've shopped the market, you probably know that the standard, plain-vanilla ARM comes with a 2-point annual rate-rise cap and a 6-point lifetime ceiling. But there are 1-point yearly rate caps out there, as well as 5-point lifetime rate ceilings. The best of them come with little or no extra cost tacked on elsewhere: no extra-fat margin, no higher down payment minimums, no higher rates, no tougher income-qualification standards.
A generous "teaser" rate that isn't the whole show. That is, you get your 7 or 7 1/2 percent rate up-front, but you don't then get clobbered with a 3 1/4-point monster margin, and l5 percent maximum rate limit.
A final note about another important ARMs component: the index. Make sure it's one that suits your own income prospects for the next several years, and your personal financial style.
As your real-estate broker should be able to discuss with you in detail, there are "hot," highly volatile, indexes -- particularly short-term Treasuries -- and slow-moving indexes, such as S&Ls "cost-of-funds" measures.
If you want the opportunity to catch downward rate movements quickly -- and can stomach the chance that you'll catch the reverse -- go with a Treasury index.
But if you like stability built into your holiday loan bargains, a cost-of-funds index is probably part of the right package for you.