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Lenders expand adjustable-rate-mortgage options

SHARE Lenders expand adjustable-rate-mortgage options

Even though only 20 percent of home mortgage borrowers are now choosing an adjustable rate mortgage, lenders still like these loans and are expanding the choices available, a survey finds.

Freddie Mac, a big secondary mortgage firm, found that 64 percent of lenders it surveyed are offering a 7-1 ARM, which locks in a rate for the first seven years and then turns into a one-year adjustable. Last year only 55 percent of lenders offered the 7-1 ARM.Similarly, 52 percent of lenders surveyed are offering a 10-1 ARM, compared with 45 percent last year.

"Longer-term ARMs are a compromise that requires locking in for a longer period than one year, but they give the borrower a lower rate than a fixed-rate mortgage," noted Robert Van Order, chief economist for Freddie Mac. "These longer-term ARMs are popular with borrowers expecting to move before the rate is scheduled to adjust."

The rates on longer-term ARMs are similar to those on balloon mortgages that end after seven or 10 years but are amortized over 30 years to hold down monthly payments. As of mid-October the national average on a seven-year balloon was 7.01 percent, according to the Mortgage Bankers Association. By comparison, a 30-year fixed rate mortgage average was 7.43 percent.

That's not much of a difference, but over 10 years it adds up. For example, payments on a $130,000 mortgage at 7.01 percent would be $865.77 a month compared with $902.76 with a loan of 7.43 percent - $36.99 more each month. Over 10 years, you pay $4,438 more.

Still, few borrowers choose balloon mortgages, held back no doubt by the fear factors - what happens if we're still in the house seven years from now and interest rates make it hard to refinance? The Mortgage Bankers Association consistently reports that balloon mortgages account for less than 5 percent of mortgage activity. Currently, with fixed-rate mortgage rates fairly low, balloons are only 1.9 percent of the total.

When you have a lot of debt, it's tempting to bundle it all into one account with one lower monthly payment. And there are plenty of lenders out there willing to help you accomplish this goal.

Unfortunately, what many people forget - or prefer not to think about - is that if you lower your payments, it will take you longer to pay off the debt. Marc Eisenson, publisher of The Pocket Change Investor newsletter, says one of the worst things you can do is accept one of the new 125 percent home equity loans.

These loans allow you to borrow all the equity in your house plus 25 percent more. They're designed for people in financial trouble who don't have much equity built up in their houses. But, says Eisenson, such loans "often have very high closing costs - as much as $5,000 on a $25,000 loan. If you have to sell, chances are you won't be able to get anyone to pay more than your house is worth."