The Real Deal New York

As mortgage rates slowly rise, buyers weigh fixed vs. adjustable

November 14, 2007
By Matthew Strozier

New York homebuyers have seen the last of rock-bottom mortgage rates, but many may still take their cues from former Federal Reserve Board Chairman Alan Greenspan’s observation that adjustable-rate mortgages offer financial “flexibility.”

Much has changed since Greenspan gave ARMs a plug last year, saying borrowers at 30-year rates had lost out on savings. Now the gap between fixed and adjustable rates is closing, and buyers may decide the higher cost is worth security at a time of rising rates. The national average for 30-year mortgage rates rose to 6.28 percent in mid-February, up from 5.63 percent last year, while one-year ARMs reached an average rate of 5.36 percent. New ARMs made up only 29.6 percent of loan originations in mid-February, after hitting historic highs near 35 percent over the last two years.

New York market observers said they haven’t seen a marked change in buyer behavior, adding that the logic that more predictable monthly costs would drive buyers to fixed-rate loans is not as straightforward as it would seem, particularly in New York.

“I don’t see people jumping on the fixed-rate bandwagon just because rates are up,” said Eric Barron of the Barron Group.

Still, several experts agreed that they are seeing more interest in fixed-rate mortgages, particularly among people who refinanced with a hybrid adjustable-rate and are now coming out of the fixed period of the mortgage. They also said that an “inverse yield curve” has developed in which the savings in the ARM are often not great enough to compensate for the risk.

Also, new Fed Chairman Ben Bernanke hasn’t ruled out further rate hikes, which means buyers could still get themselves a good deal, in both relative and historic terms, with a 30-year loan at current rates.

Paul Levine, COO of Homebridge Mortgage Bankers, said that in some cases, the adjustable-rate mortgage can mean just one-eighth of 1 percent savings. With the cost difference so small, he said that many people will opt for the security of a fixed-rate. “I’d rather have that security,” he said.

In addition, he said that for an additional half point, approximately, in closing costs, the consumer “can buy down the 30-year fixed rate to match the adjustable-rate, or even spend more and buy it down lower than the adjustable-rate would be.”

There is also a general sense that rates will continue to creep upward, or at least not go back down. “It doesn’t look like it is getting better. It looks like this is where we are going to be,” said Levine.

But New York’s high prices are pushing borrowers often willing to take whatever savings they can get to afford the huge mortgages. Robert Hochberg, of Hochberg & Holland Associates, said that fixed-rate mortgages are popular for customers looking for mortgages of $200,000 to $300,000, but New York City has studios selling for $500,000. “It’s twilight zone stuff,” he said.

And while rates have risen overall, Hochberg said that some banks have kept low introductory rates on ARMs, making the risk that much more palatable.

Rising rates also haven’t diminished the allure of interest-only loans. “Here’s the bottom line: Prices are expensive. And to afford some of these prices, interest-only is still the most popular,” said Barron, who said half his business is in interest-only loans. Barron and others said that many people don’t realize that borrowers can pay principal on interest-only loans whenever they want.

“We haven’t seen any fewer requests for interest-only products,” Levine, of Homebridge, said. “We haven’t seen it increase. It’s been quite healthy for the last 12 months.”

The appeal of interest-only seems clear. Barron used as an example a $700,000 mortgage, based on mid-February rates. An interest-only mortgage borrower would pay about $800 less than the borrower with the 30-year fixed during the interest-only period. This means that the buyer can afford a lot more, making the interest-only loan the “real estate agent’s best friend,” Barron joked.

In many cases, buyers in the city are blending the interest-only and fixed-rate mortgages. Melissa Cohn, president of Manhattan Mortgage, said that buyers are seeking out 30-year fixed mortgages with the first 10 years of interest-only payments. This means a significant rise in monthly payments after a decade, but Cohn said “people seem to want the security to know that even after 10 years, the rate will not go up.”

The other popular mortgage, she said, is the five-year adjustable, which fluctuates after five years. In both cases, Cohn said that buyers in New York want loans for the near future because they will move once they can afford a larger apartment, not in 30 years. “New York is unique,” she said, “in the sense that people buy for their immediate needs.”

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