Slowing Market Prompts New Mortgage Plans To Help Buyers

The local housing market may be flat, but you can't blame it on high

interest rates.

In fact, things could be a lot worse. If you think potential buyers are standing on the sidelines waiting to see what happens to our economy and the Middle East, just think what would happen if the interest rates were above 12 percent.

They aren't. The interest rates on 30-year fixed mortgages averaged about 10 to 10 1/8 percent last week with a loan fee of 2 percent of the loan amount, according to several Puget Sound area lenders.

``Everything seems to be pretty volatile right now,'' said Monique Merys of Bay Mortgage East, a Bellevue brokerage. ``People tend to be taking very few risks so they are staying with the long-term loans. If the rates go up, and there's a good chance they could, the feeling is people will be looking more to adjustable products.''

One-year adjustable-rate mortgages averaged about 8 1/4 percent last week with a few lenders trying to lead the market with programs just under the 8 percent mark.

Typically, the difference between a one-year ARM and a fixed-rate loan is about 2 percentage points. When the gap is less, the ARM risk usually doesn't benefit the consumer. The first year of the ARM is usually discounted so that the second-year rate is higher even if conditions remain the same.

Some borrowers are opting for fixed-rate products due in five or seven years. These loans come with lower interest rates (about 9 1/2 for a loan due in five years, or 9 3/4 for one due in seven years) and are excellent, predictable loans for buyers who expect to move again before the loan is due. If these borrowers don't move again, the loans usually can be converted to conventional, fixed-rate loans after the call period.

Ninety-five percent of the loans we are doing are fixed-rate loans,'' said Louise Meier of Barigar, Meier and Associates in Seattle.

When a lender says 95 percent of volume is fixed-rate, you can bet without even looking that the market is under 10 1/2 percent for fixed rates. Buyers generally don't move to ARMs in great numbers until fixed rates reach about 11 percent.

One thing borrowers must remember is that rates and fees change constantly, especially in a soft housing market in which some lenders are overly eager for business. Don't accept our mortgage chart as gospel because the market could change substantially in a day. In addition to the standard mortgages, there are some new packages appearing that combine a mortgage loan with another product, or set up the borrower to pay off the loan early, or try to help buyers making contingency offers.

The Hammond Company's, for example, is offering a ``contingency buster'' program. This loan can be set up as a monthly or semi-annual adjustable-rate loan. The borrower has the option of deferring payments for three months. It's called a contingency buster because the mortgage debt on the borrower's current house is not counted as part of the qualification process.

Let's say your present mortgage payment is $550. You put your house on the market, after finding your dream house. You make an offer on the dream house contingent on selling your present home, but it doesn't sell quickly.

Under Hammond's plan, you can apply for a loan to buy the dream house and count the $550 as ``spendable'' income instead of as a monthly loan debt.

You can defer the payments on the dream house for three months, which frees up cash flow at moving time. Just don't forget that you'll pay for that arrangement over the long haul because the amount you borrow will be more to accommodate the three payments.

The early payoff mortgage plans also seem to be prompting some interest.

Thomas McClain of Woodinville has started Federal Funding Corp of America, which is offering brokers and bankers in nine western states a biweekly loan package that reduces the life of the loan. The concept is not new, but previous products were mostly developed by lenders who kept the packages ``in house.''

Consumers may start seeing more of these bi-weekly payment loans.

Hallmark Mortgage in Bellevue, for example, is offering a loan package that combines a mortgage with a bi-weekly payment schedule with a tax-deferred annuity plan designed to help the borrower save for retirement.

A bi-weekly payment schedule means that the holder of a 30-year mortgage will pay the loan off in 20 years, saving thousands of dollars in interest payments. (The result is the same as if you made a 13th payment - to principal - on your loan each year.)

Hallmark has collaborated with its affiliate, Hallmark Insurance Services, to add the tax-deferred annuity. There is also a plan that pays off the mortgage in 15 years.

But say you borrowed $100,000 at 10 percent interest for 20 years on an accelerated-payment plan. Here's the breakdown using Hallmark's formula: Your monthly payment would be $966.32 - $877.57 to principal and interest, $83.33 to the annuity and a $5.42 monthly service charge.

After 20 years, your mortgage would be paid, saving you $73,674 in interest over a conventional 30-year loan plan. Your tax-deferred annuity would be worth $55,866.69.

To show you what regular contributions to an investment can do. Assume you continued to pay $966.32 a month into the annuity for another 10 years. Using the current 9 percent interest rate, you'd now have an annuity worth $324,000.

None of us really needs a mortgage lender to do this for us. We can save the set-up and monthly service fees by simply socking $83.33 a month away in a tax-deferred annuity. And we are often told to prepay our mortgages to save thousands of dollars in interest payments. Actually doing it seems to be another matter.