Mortgage rates remain almost the same
By Holden Lewis • Bankrate.com

Mortgage rates didn't change much in a quiet week.

The benchmark 30-year fixed-rate mortgage remained unchanged, at 6.74 percent, according to the Bankrate.com national survey of large lenders.

The mortgages in this week's survey had an average total of 0.42 discount and origination points. One year ago, the mortgage index was 6.68 percent; four weeks ago, it was 6.42 percent.

The benchmark 15-year fixed-rate mortgage fell 1 basis point, to 6.26 percent. A basis point is one-hundredth of 1 percentage point. The 30-year fixed-rate jumbo mortgage, for larger loans, was unchanged at 7.68 percent. The benchmark 5/1 adjustable-rate mortgage rose 2 basis points, to 6.34 percent.

Weekly national mortgage survey

Results of Bankrate.com's Aug. 13, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

ARMs go down
Most borrowers are getting fixed-rate loans nowadays. According to the Mortgage Bankers Association, about 13 out of every 14 applicants last week asked for fixed-rate mortgages. Only a few wanted ARMs.

When homeowners with hybrid ARMs refinance their loans, it's almost always to get a fixed-rate loan, according to Freddie Mac. A hybrid ARM has an introductory rate that is fixed for several years, usually three or five, and then the rate is adjusted annually. They are most commonly known as 3/1 and 5/1 ARMs. During the second quarter of this year, people refinancing out of hybrid ARMs preferred fixed-rate loans 87 percent of the time, according to Freddie Mac.

Most refinancers got fixed-rate loans even though the rates are higher for fixed-rate mortgages than for ARMs. Freddie Mac's chief economist, Frank Nothaft, speculates that "the concerns about inflationary pressures leading to future interest rate increases may be causing borrowers to choose the safety and certainty of fixed rates."

What will you pay in 7 years?
The specter of rising rates explains why borrowers are shying away from ARMs, and regulation partly explains why lenders aren't pushing them. Jeff Lazerson, president of the online brokerage MortgageGrader.com, notes the Federal Reserve has tightened the rules on certain kinds of ARMs.

Specifically, the Fed says "high-cost" ARMs -- subprime and some jumbo adjustable mortgages -- can be underwritten only if the borrower could afford the highest possible payment seven years later. "That's a strong reason that lenders aren't going to be real interested in doing five-year ARMs or even three-year ARMs, because you have to qualify based on seven years out," Lazerson says.

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ARMs get bad rap
On top of that, investors aren't terribly interested in buying ARMs, he says, adding: "The other reason is in the media, this story just keeps getting worse and worse -- about how the mortgage industry thought we hit bottom, but we've actually gone through the bottom of the barrel and we're in the ground now. The bleeding hasn't stopped yet, so every consumer who needs to do something is scared to death of anything but a fixed-rate mortgage."

Lazerson believes this fear is an overreaction -- "everybody has become overzealous in terms of safety."

Knowledgeable borrowers who remain within their means should be OK with ARMs, he says.

Who wants ARMs?
Certainly, some borrowers embrace adjustables. Ellen Bitton, president of Park Avenue Mortgage, based in Manhattan, has lots of clients who get mortgages of well over $1 million. "These people," she says, "don't want 30-year fixed rates." At such large loan amounts, a small difference in rate can make a big difference in monthly payments, so a lot of these borrowers ask for one-year ARMs, or 3/1 or 5/1 hybrid ARMs.

Some borrowers have even more practical concerns: Bitton says she recently got a call from an 80-year-old client whose 5/1 ARM for $700,000 is due for a rate adjustment this fall. "He said, 'Give me another five-year ARM, because who knows if I'll be alive in five years?'"