Mortgage market has opportunities for consumers

MADISON, Wis. (11/4/09)--Nearly 6.5 million home owners are deciding whether to stay with their adjustable-rate mortgages or lock in fixed rates (Money November).

In fact, September's 9.4% sales increase was the largest monthly hike in 26 years as buyers moved to qualify for the first-time buyers incentives expiring this month. Nationwide, sales are up nearly 24% since January (MSNBC Oct. 23).

Foreclosures and short sales--where the mortgage exceeds the sales price--have forced prices downward 9% from a year earlier. The median price in September was $174,900, down from $191,200 in September 2008. And prices could fall further if unemployment, expected to rise to 10.5% next year, leads to more foreclosures. Inventories of unsold homes, which fell about 7% in September, are at their lowest level since March of 2007 but could well rise with higher unemployment.

In fact, what is happening in the mortgage market is regional. During the past three years, home prices in metro areas of 23 states recorded gains. The South, the Plains, and most of the non-coastal West showed some ability to weather the stormy mortgage market, according to Fiserv (CNN/Money Oct. 21). Meanwhile, 16 states--those in the Northeast plus California, Florida, Nevada, and Arizona--have posted declines.

For many consumers, the issue is whether to lock in a fixed rate. Roughly 6.5 million homeowners have adjustable-rate mortgages (ARMs) and many of those notes are coming up for adjustment.

For the short term, consumers with ARMs should be fine. But once the economy stabilizes and the government starts to remove policies that are keeping mortgage rates low, rates are likely to rise.

Here are some thoughts about whether to stand pat with your ARM or move to a fixed rate:

If you plan to move within the next three years, if you have less than 20% equity in your home and home prices have taken a beating in your community, or if you have a jumbo mortgage, you may be better off with your existing ARM.

If you plan to move in the next three to five years or you have a jumbo mortgage, look at a 5/1 ARM. (A 5/1 ARM locks your interest rate for the first five years and then can adjust annually for the life of the loan.)

If you plan to stay in your home for more than five years, or you plan to use the equity in your home for college expenses or some other need, you may want to look at a fixed-rate mortgage now; they are not likely to go lower after the next year or so.

If you have doubts about your future plans, it is usually safer to lock in a low rate while you can.