PREPARING FOR RISING MORTGAGE INTEREST RATES

For the past two years or so, Americans have enjoyed the lowest mortgage interest rates in 40 years. In 1955, mortgage interest rates were approximately 3.25%. Those were the good old days. Many of us can recall 1990 when mortgage interest rates were approximately 9%. It appears that, starting mid 2004, mortgage interest rates may again be on the rise.

The home loan market has changed dramatically in the past 50 years. For one thing, in 1955, a family would save for many years for the required 20-30% down payment to purchase a home. Today, with mortgage insurance, home loans can be obtained with 10% down, 5% down, and for a price, even no down payment. For sure, mortgage companies will be charging a higher interest rate when the down payment is lower, but that's a small price to pay for the benefits of home ownership.

30 YEAR FIXED RATE OR ARM?
Today's mortgage companies offer a lot of flexibility when it comes time to select the term of your new
mortgage loan. The 30 year fixed rate loan is certainly not the only option and, in fact, is not always the best option. Since we are a more transient society than ever before in our history, the selection of a 30 year fixed rate mortgage loan is rarely a good selection. Lenders charge quite a premium for keeping your interest rate fixed for 30 years. The longer the term of the loan, the higher the interest rate. An example would be the difference in a loan fixed for 30 years at 6%. The same loan fixed for 5 years would have an interest rate of 5%. On a $300,000 loan amount, the difference would be $188 per month.

The average home owner in the Washington/Baltimore Metropolitan area keeps their first home for about 3 years. The starter home purchased by the average first time home buyer starts to feel smaller when the first child arrives. Or, the home owners income increases to a point where they can afford the home they can live in for many years. One way or another, folks to sell or refinance their mortgage on an average of three years in this area. So, it makes little sense to pay a premium for that 30 years fixed rate home loan.

With rates starting to go up, home buyers may be tempted to hold out for the 30 year fixed loan. But, does it make sense when the odds of you owning that same home 5 years from now are slim? If you are a home owner who believes that they will be in the home you're searching for now for more than 7 years, then a 30 year home loan is for you.

ADJUSTABLE RATE MORTGAGES
Loan terms can be fixed for as littls as 30 days to as long as 40-50 years. The shorter the term (risk to the lender), the lower interest rate. Probably the most popular ARM in the Washington and Baltimore real estate market is an ARM that is fixed for 5 years. The interest is usually 1% or more lower than the traditional 30 year fixed loan. However, loans can be fixed for very short terms, another popular loan is the 6 month ARM that adjusts very slowly and is a very good investment for someone who believes that they will only own the home they are buying for 3 years or less. Loans can be fixed for 1 year, 2 years, 3 years, 5 years, 7 years, 10 years and 15 years. The savings vary depending on the interest rate, but you will save with an ARM.

Ask the lender about these loan types and terms. You might be surprised how much money you can save by resisting the "good old" 30 year fixed mortgage.

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