Mortgage rates rise

Lenders optimistic market will stay hot

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— Rates on 30-year mortgages have hovered comfortably in the mid- to upper 5 percent range most of the year.

Inflationary pressure and perhaps increased investor confidence in the stock market is likely to change that, say lenders, some of whom expect 30-year rates to tip the 6 percent mark by 2006.

Rates have been rising since the beginning of September. On Thursday, the average rate on a 30-year fixed-rate mortgage was 5.91 percent -- the highest it's been since last spring, when rates peaked at 6.04 percent, according to a weekly survey by the Freddie Mac corporate mortgage company.

At the same time, the rate gap between adjustable-rate mortgages and fixed-rate mortgages is decreasing, making adjustable-rate packages less desirable to some buyers.

Still, high demand and low inventory continues to push up values in Routt County and other resort areas, providing more cushion for buyers with floating rate, interest-only and other riskier loan options, lenders say.

Rising rates

Most lenders look to yields on the 10-year Treasury note when gauging the 30-year fixed rate. People in the secondary market tend to use the "T-Note" as a benchmark for value when buying and selling mortgages, explained Mike Larson, vice president of Mountain Valley Bank.

Yields on Treasury securities fall with growing demand, subsequently keeping mortgage rates steady.

Baby boomers nearing retirement tend to be more interested in fixed-year investments and have helped fuel the demand for Treasury notes, as have investors wary of a volatile stock market, said Darren Robinson, community relations manager for Bank of the West.

Inflationary fear also can play into Treasury yields. If investors are concerned about inflation, they tend to stay away from long-term Treasuries, though the feeling in the industry is that long-term inflation is under control, he said.

Although Treasury yields vary day to day, the yield on the 10-year note has been inching upward and reached 4.29 percent Thursday.

Expectations for more economic growth may further divert investors' attention from Treasury notes.

"If there's perceived solid long-term growth in the economy, people are probably going to start investing in the stock market instead," Robinson said.

Various factors could play into Federal Reserve Board Chairman Alan Greenspan's concerns about inflation and whether he will continue to raise the federal funds rate -- an overnight lending rate between banks that can influence other borrowing costs.

High oil prices, which will begin to have a big effect on heating costs, is putting some inflationary pressure on the economy. However, expectations for a lowered Gross National Product as a result of Hurricane Katrina should offset some of that pressure, Larson said.

Greenspan has two meetings left before he steps down from his position at the end of the year. Larson expects Greenspan to raise rates at one meeting and leave rates flat at the other meeting.

"The temptation to keep moving it up is tempered by the Gross National Product," Larson said.

Inflation may be in control in the short term, but questions about energy costs as well as a huge demand for building materials in the Gulf Coast likely will influence inflation concerns in the long run, he said.

"You've got different signals going different directions," Larson said.

Although it appears mortgage rates likely will continue to rise, it's important to realize they still will be low by historical standards, said broker Erik Dargevics of Mountain Capital Cherry Creek Mortgage.

He pointed out that mortgage rates in the late 1980s peaked at 15 percent.

"Are they going to go up a little? Yes. Is it going to make the housing market crash if it goes up to 6 or 7 percent? No," Dargevics said.

Although it's not a time to panic, it is time to take advantage of the still-low rates by locking in and paying off home debt.

"The conservative homeowner should be doing everything they can to pay down their mortgage as fast as possible, from a retirement standpoint," Dargevics said.

Short-term rates

and interest-only

Perhaps in response to rising rates, Greenspan has voiced concern about mortgage products such as interest-only loans and floating-rate loans that often help buyers get into markets they otherwise wouldn't be able to afford.

Interest rates for adjustable-rate mortgages are fixed for a set number of years and then periodically adjust based on certain indexes.

Short-term rates for 5/1 ARMs or 1-year ARMs typically are lower than long-term mortgage rates, but that gap has tightened, making fixed-rate mortgages a more attractive option for buyers nationally and locally, Larson said.

Many of his clients whose loans soon will be rotating to adjustable rates are opting to refinance under a fixed-rate mortgage, he said.

"With the pricing spread, the 30-year fixed is what most people are going with," he said.

ARMs can be a good option for buyers who plan to be in their homes for a short period of time. In Steamboat, short-term loans are popular with families on the "move up" phase who want to get into a market, build equity and eventually upgrade, Robinson said.

Short-term and interest-only mortgages also are appealing to builders who construct homes, live in the homes for a limited time for tax purposes, and then sell them. They want payments as low as possible in the interim, Dargevics said.

They key to ARMs is to "buy money" only for the amount of time buyers need it, he said.

ARMs still can be risky for buyers on tight budgets. If they are not paying on the principal and rates increase, so will their payments, though each buyer has a different financial picture, Dargevics said.

The appeal of short-term loans may be waning, but many local buyers still are looking to interest-only loans as a way to get into the expensive local market, Larson said.

"As long as it's a rising market like ours, interest-only is reasonably safe," he said.

Lenders agree that Steamboat and Routt County will continue to see more demand, in turn allowing buyers more leeway in their loan choices than they might find in other markets.

"We are very blessed to live on the Western Slope," Dargevics said. "I think our property values are going to continue to appreciate."

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