Jumpy mortgage rates make would-be homeowners jumpy

Most days, First Union Mortgage Corporation in Charlotte, N.C., puts out one list of mortgage rates each morning. About two weeks ago, the firm began sending out another list every afternoon at 2:00. One day last week, says Robert Rocklein, vice-president of Commonwealth Mortgage Company in Boston, some lenders were quoting rates on 30-year, fixed-interest mortgages of 10 percent early in the morning, 11 percent before noon, and 10 percent a few hours later.

Commonwealth avoided the three-rates-a-day syndrome, Mr. Rocklein says, but its rates did go up from 9 percent last Monday to 10 percent on Wednesday.

Jumps like these are the kind of things that make homebuyers worry. They don't do much to cheer people refinancing home loans, either. In the last couple of weeks, mortgage rates, which had been resting happily at 9 to 9 percent for several weeks, suddenly took off and are averaging 10 to 10 percent, the first time since last October that rates have been above 10 percent.

Coming at the start of the traditional spring real estate shopping season, the rate increase has only added to the usually hectic pace. Real estate agents in many parts of the country report more people coming in to see what's on the market. Lenders, meanwhile, are getting pressure to complete applications and give borrowers commitments as soon as possible, to give them a rate with monthly payments they can still afford.

The reason for the rate increase is a phenomenon that's fairly new to the mortgage business. As more lenders have packaged their mortgages and sold them as securities, the people and institutions who invest in them have come to expect returns that are competitive with what they could get in the bond market.

In recent weeks, both the bond market and the mortgage securities market have been reacting to the falling dollar - overreacting, some say. As a result, when bond investors got anxious about the dollar, mortgage securities investors got anxious, too, and pushed up yields.

Fortunately, say most of the people who have been watching these goings-on, it probably won't last.

``Rates could go up another half point,'' says David Wyss, senior vice-president at Data Resources Inc., a Lexington, Mass., consulting firm. The secondary market, where mortgage securities are traded, he said, ``went wild. It overreacted to what was going on.''

``The fundamentals don't justify higher rates,'' agrees Warren Lasko, executive vice-president of the Mortgage Bankers Association. ``Interest rates are tied to inflation, and there's no reason to expect rates to go up based on that. In fact, there's reason for hope that rates will go back down a bit.''

``I don't think rates will go much higher, maybe 40 or 50 basis points [four- to five-tenths of a percentage point],'' says John Tuccillo, vice-president and chief economist at the National Association of Realtors. ``Or, they might go down 40 or 50 basis points.''

Lately, Mr. Tuccillo says, mortgage securities have been acting like 30-day Treasury bills, which tend to be more volatile in times like these. Mortgage securities normally perform more like 30-year Treasuries, he says, and as they return to that standard, they will become more stable.

In the meantime, the faster pace of new mortgage applications, combined with the spring buying season, mean people have to keep an even closer watch on their loan application process.

``It always pays to bird-dog your mortgage process, no matter what the interest rate,'' Tuccillo says. This means finding out the name of the person - or underwriter - who is handling your mortgage at the bank or mortgage company and making sure he or she has all the information needed. This includes the appraisal, employment verification statements, income reports, and credit histories.

You should also be prepared for a backlog from others involved in the mortgage process, including apprasiers, attorneys, and inspectors. If you are responsible for hiring any of these people, contact them as soon as your bid has been accepted and make early appointments for them to see you or the home you are buying.

When rates seem to be going up, it's also a good idea to make sure you qualify for the loan at both the current lower rate and a possibly higher level. If you can just barely meet the monthly payments of principal, interest, taxes, and insurance at 10 percent, for instance, you might not make it at 10 percent.

If this is the case, see if there is a way you can put down a bigger down payment, or pay an additional ``point'' - equal to one percent of the loan balance - to lock in today's lower rate.

``Some lenders are making rate commitments now,'' Mr. Lasko says. ``But if they're careful, they need to charge a fee for doing it.''

Buyers aren't the only ones affected by a jump in mortgage rates, Lasko says. Sellers must realize that even if someone makes a lower-than-expected bid for their house, the would-be buyer might still be stretching to make payments if rates go up.

``The price of homes and interest rates are inherently related,'' he says. ``Higher rates mean sellers probably can't expect as handsome a price increase as they anticipated.''

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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