Rates on 30-Year fixed rated mortgages rose for a second straight week. (more…)

With all the bad mortgage and housing market news, FloridaHomeLoan.com would like to offer you some positive mortgage advice. (more…)

Thinking about Florida mortgage refinancing to a fixed rate? Consider this story:

Keith and June Forstrom reaped the benefits of adjustable-rate mortgages during the last few years. But now they’ve traded in their one-year ARM, with monthly payments of $1,060, for an old-fashioned 30-year fixed-interest loan.

The Forstroms refinanced out of the interest-only loan of $203,000 last month on their two-bedroom patio home. They chose a 30-year fixed loan of $125,000 with a slightly higher rate.

Now they’ll have more predictable monthly payments of $933. This, of course, is the idea for anyone that wishes to refinance a Florida home loan.

“We realized that rates could very well go up, and we didn’t want to be stuck with that,” said Keith, 75, a retired real-estate broker.

Advantages of Florida home mortgage refinancing

Some homeowners who rushed into ARMs during the previous five years - taking advantage of some of the lowest interest rates in decades - are now converting those loans as their rates adjust upward.

Consider: Interest rates on 30-year fixed Florida home loans are close to or higher than rates on some ARMs that are resetting after an initial fixed-rate period.

The Mortgage Bankers Association reported Wednesday that the gap between the average interest rates on a 30-year fixed loan (6.18 percent) and an ARM with a one-year fixed rate (5.9 percent) is the narrowest it has been since January 2001.

Meanwhile, ARMs have risen more quickly as the Federal Reserve has lifted short-term rates since mid-2004. ARMs, whose rates typically rise after three to seven years, have declined as a share of all refinancings, according to the mortgage bankers group.

“A lot of people are going to feel the full effect of all these rate increases when their mortgages reset,” said Greg McBride, senior financial analyst for Bankrate.com, based in North Palm Beach, Fla.

Not everyone, however, thinks refinancing out of an ARM makes sense now.

Should you consider Florida home loan refinancing?

Broker Mike Thomas of Hyperion Capital Group in Aurora said most ARMs have a cap restricting how much the interest rate can rise in one year.

Rates were so low in 2003 and 2004 that most three-year ARM rates being reset are still under 6 percent. Borrowers may be better off staying with their ARM and seeing what the Federal Reserve does with rates during the next 12 months.

“Sometimes it’s better to ride it out and wait,” he said.

Overall, mortgage lending activity has fallen 21 percent during the last year. Moreover, the trend away from ARMs is being fueled in part by Florida mortgage brokers. Many ads tout 30-year rates rather than the low ARM rates.

“I don’t remember the last time I sold an ARM,” said Tim Glaser of 1st Community Trust Mortgage in Greenwood Village, who refinanced the Forstroms.

Some brokers are calling former clients offering to get them out of their ARMs.
David Hutton, sales manager with Paragon Mortgage Services in Denver, recently persuaded Lakewood homeowner David Anderson to refinance by showing him he could save $200 a month.

Anderson said the monthly payment on his option ARM started at about $1,200 in early 2004 but is now nearly $2,000. Hutton arranged for a 30-year fixed loan that will reduce Anderson’s payment to roughly $1,800, including a one-time $1,200 prepayment penalty on his old loan.

“The adjustable rate was real good for us at the time, but it’s gone up,” Anderson said. “Who knows where it’s going to go from here?”

A quick look at 30-year, fixed-rate home loans would almost convince you that the Federal Reserve’s dozen interest rate hikes and all the predictions of the housing market collapsing have been meaningless, writes Susan Tompor of the Detroit Free Press. Indeed, the average 30-year mortgage rate (6.39 percent) is only marginally higher than it was 18 months ago (6.30 percent).

The Federal Reserve bumped up short-term rates Tuesday — marking the 13th rate hike in as many meetings — by a quarter of a point to 4.25 percent, the highest level since mid-2001. It was also implied by the board that its campaign to raise rates to fight inflation is nearing an end. But as the Fed was raising rates time and again, something funny happened to the staple, 30-year fixed-rate mortgage. It dropped.

Only in recent months, as bond traders began worrying more about inflation than the overall worsening of the U.S. economy, did long-term mortgage rates inch up. Last week, the national average of fixed-rate 30-year mortgage loans was 6.39 percent, the highest level in more than two years. Yet less than a tenth of a percentage point higher than 18 months ago, according to Bankrate.com.

But don’t let this 30-year calm fool you altogether. Beginning this July, home sales have begun to slow down nationwide.

“The big question in 2006 will be, how much further will the housing market slow down?” Greg McBride, a Bankrate.com senior analyst.

The 30-year mortgage is certainly not the loan of choice for every borrower. There are many types of mortgages, some of which have become surprisingly popular in recent years despite long-range drawbacks. You’re not going to opt for the standard 30-year deal if you’re looking to buy and flip a condo in a hot market for a quick, significant profit — if you are an condo investor in search of an Arizona or Florida home loan, for instance. The same goes for someone trying to buy a bigger, better home in a high-end neighborhood.

“What people have been doing over the last 18 months is using adjustable-rate mortgages at a higher proportion,” Douglas Duncan, of the Mortgage Bankers Association said.

Adjustable-rate home loans (ARMs) have shot up significantly, and many people who signed up for ARMs in the last few years will soon see their monthly payments shoot up.

“It makes life more difficult for potential home buyers — and also for homeowners with ARMs,” said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pa.

CRUNCHING THE NUMBERS

If you took out a 1-year ARM a year ago, you probably received a rate close to the average of 4.15 percent. This year, the rate went up a full percentage point to 5.16 percent as of last week, the Mortgage Bankers Association says. In other words, buyers who tapped into ARMs will soon be seeing their monthly payments grow.

A 1-year ARM secured in June 2004 had an average rate of 4.4 percent, but in June 2005, once that mortgage rate was adjusted, the rate would have gone up to an average of 5.9 percent. Ouch. That equates to an extra $180 per month on a $200,000 mortgage, with the overall mortgage payment of interest and principal rising to $1,181 a month. That’s not all. If the homeowner kept that loan, the rate (and monthly payment) will likely go up again in 2006.

Not all homeowners will feel the pinch immediately, however. Some ARMs may lock in a rate for the first three or five years and won’t adjust until after that time frame. At the same time, economists are not exactly expecting mortgage rates or other interest rates to fall again any time soon.

BATTLING INFLATION

Why has the Fed been raising the short-term rates so consistently? Because the U.S. economy was starting to get stronger, and higher interest rates are seen as a way of putting the brakes on inflation by tempering demand and cooling off rapidly rising prices. Before the rate hikes began, the federal funds rate had at one point fallen to a 46-year low at 1 percent. The Fed had pushed rates that low to deal with uneasiness, recession and terrorism on Wall Street.

Some expect the Fed could again raise rates in January and March to bump up the federal funds rate closer to 4.75 percent by the middle of next year. Dana Johnson, chief economist for Comerica Bank, doesn’t predict that the national housing market will collapse as a result of higher rates, but believes the rising rates will contribute more in the months ahead to the slower housing sales already observed.

He and other experts think the 30-year fixed rate will climb to about 7 percent by later next year, while home sales nationwide drop by 3-4 percent as rates edge upward.

What does this mean for the Florida home loan market in 2006? Be careful. Shy away from the riskier loan options and make sure you do your research. As rates rise, Florida home prices should drop and give first-time buyers some breathing room. Standard 30-year Florida mortgage loans are still strong resources for residents to buy homes and build equity over the long run. It’s the people looking for quick profits that may take the biggest hit.