Very interesting…

Mortgage rates are rising, so now might be the time to shed your adjustable-rate loan and lock in a deal.

BY GAIL MARKSJARVIS
Pioneer Press

Now's your chance.

If you have an adjustable-rate mortgage, adjustable home-equity loan or a home equity line of credit, and you know you won't be able to afford higher payments, you cannot afford to put your head in the sand.

Mortgage rates have been rising, and economists are predicting that the 4 percent ARM of last year could become 7 percent by the end of next year. On a $200,000 mortgage, that would mean payments would jump from $955 a month to $1,331 — a hefty blow to any household budget.

No one can be sure that will happen, of course. Mortgage rates are erratic — climbing on days when economic data point to faster growth in the economy and falling on days when it looks like the economy might falter.

Even the savviest of economists admit they can't predict the future with certainty because political and financial events come out of the blue — affecting the economy and interest rates. If you doubt it, think: the 2001 terrorist attacks, the war in Iraq, gasoline prices jumping from about $1.20 a gallon to $2.16 in just a few months.

But don't let uncertainty lull you into wishful thinking. If economists are right about the future, people who have been ignoring rising interest rates could be kicking themselves in a year.

Thinking about it now could let them lock in mortgage rates that are still considerably lower than they've been through history.

Last week, the national average for 30-year fixed mortgages was 6.08 percent — a much better deal than the 6.9 percent that is expected next year. (For insight into predictions, refer to the column I wrote in Sunday's business section. Find it at www.twincities.com. On the left side of the home page, click on "business," then "columnists" and then my name.)

Then, take out your loan documents and consider your worst-case scenarios. If you are sure you can handle the highest rates your ARM will adjust to, you can put the documents away. But if you can't, you have to think seriously about your choices. Here's what to consider:

How long will you be staying in your home?

About two-thirds of people with ARMs have been able to lock in low rates for three- or five-year periods. After that, their interest rates may jump as much as 2 percent a year as long as they don't exceed a lifetime cap — maybe 10 to 12 percent.

You may kick yourself in the future if you are stuck with a 10 percent rate when you could have locked in at last Friday's 30-year fixed 5 7/8 percent. Yet, if you are sure you will be moving before your mortgage can start adjusting upward, there is no reason to give up the temporary comfort of a low rate, says Lending Tree president Anthony Hsieh.

But think about your future realistically.

Your family may be growing, and you may want a larger home in three years, but will you make a move regardless of market conditions? Many economists currently are predicting that home values will stagnate or even fall from today's frothy levels. If you had to sell your home at a loss, would you still move in three years?

Where can your home equity loan go?

The interest on some of these loans can climb into the teens, taking payments to levels families never anticipated during a period of stable low rates in 2003. But now Hsieh says it wouldn't be unrealistic to face rates of 9 percent within the next three years.

His advice: Think about refinancing both your home-equity loan and your mortgage. Although this may give you a higher interest rate than you were paying on your fixed-rate mortgage, locking in the combination prevents the home equity loan from soaring.

Trying to figure out if this is worthwhile may seem overwhelming, but calculators on the Internet help you see your alternatives clearly. At www.bankrate.com, click on "calculators," and then play with a variety of them — especially "Should I refinance?" and "Fixed or Adjustable?" If you don't have access to a computer, it would be worth a trip to a public library to use the Internet calculators.

Reliable mortgage brokers will also help, but to test their advice, talk to at least three. Sampling banks and mortgage companies will give you a variety of views and bolster your confidence. Make sure they aren't comparing apples and oranges, and beware if their closing costs on a loan are over 2.5 percent.

If you can't lock in the full mortgage, consider locking part.

Many suburban families who wanted to avoid private mortgage insurance but couldn't afford down payments on expensive homes stretched their way into homes during the past few years by using two mortgages — both requiring that they pay only interest and no principal.

They were secure at first because interest rates couldn't rise for the first two years. But with that period about to end, Terry Sullivan, Burnsville branch manager of Klein Mortgage, suggests they consider a fixed-rate loan on at least the largest mortgage. That way, they can remove some of the uncertainty of the future, while retaining payments that won't break the household budget.

Opportunity will knock, he says, if fixed 30-year mortgages drop to 5 3/8 percent — a level that isn't likely to be repeated for long periods in the future if forecasts are correct.

Beware of ads.

Loans are based on economic conditions and financial triggers like the prime rate, Libor or 10-year U.S. Treasury Bonds. So, if you encounter a lender offering a rate far lower than others, there is probably a catch that you won't like when you figure out what you missed initially in the fine print.

Roger Harrington, a St. Paul broker, is troubled by recent radio ads telling people they are paying too much if their mortgage rate is over 4 percent. The advertised loans carry a dangerous catch.

They allow homeowners to pay an artificially low interest rate, but they aren't really saving money. Instead, their apparent savings are just poured back into the loan, so an original $100,000 loan may become $104,000 in a year, and even $125,000 several years later.

Why should a person care if that gets them a low interest rate?

Because they very well could owe more money than they will ever receive if they must sell their house.

Change your view of housing.

There has been a mania in the housing market that is not likely to continue.

Nationwide, homes have climbed 11 percent in the past year, and virtually every economist I have talked to says it cannot continue. Already, this market is showing some slowdown.

When interest rates are rising, fewer people will be able to buy homes, so sellers may have to settle for less money. Some may even have to sell homes for less than they paid.

Consequently, now is not the time to buy a house hoping to sell it fast. Nor is it wise to take on a loan thinking you will build up equity simply through a fast-growing market.

Watching mortgage lenders should tell you those most in the know think you could have trouble paying for your home or selling it.

Hsieh says throughout the mortgage industry, lenders are making sure they won't be vulnerable if people can't afford their payments and need to sell at a loss. Lenders are demanding larger down payments so borrowers think twice about walking away from their homes without paying the lender. And they are probing credit histories — looking for indications that if borrowers face financial stress, they will sacrifice whatever they must to meet their house payments.