Preparing For Higher Mortgage Rates

by Broderick Perkins DeadlineNews.Com Rates should trend up in 2005, but at a slower pace that previously expected, according to industry leaders who attended the Annual Mortgage Bankers Association conference in San Francisco, CA's Moscone Center in late 2004 Slower economic growth next year should hold average mortgage rates to 6.5 percent or lower throughout 2005, according to a mortgage trade group's forecast. That's down from the 6.75 percent originally forecast for the end of 2004. Interest rates for 30-year fixed-rate mortgages should finish 2004 almost a full percentage point lower than expected -- 5.9 percent on average -- said Doug Duncan, chief economist for the association. Still, experts caution, higher rates are inevitable and some mortgages are more vulnerable to increased rates than others. After rates have been low for extended periods and the economy is on the brink of change, it's a good time to get all your mortgage docs in row, scrutinize them, and determine how high your rate could adjust and what financing options you should consider. "There is the potential for trouble ahead. Interest rate increases on adjustable rate mortgages (ARMs) could trigger a wave of foreclosures," said Orleans, MA-based Marie McDonnell, the Mortgage Counselor, a mortgage expert who audits mortgages loans, counsels consumers and provides expert witness services. Avoiding foreclosure is material to maintaining your credit standing and related borrowing power, should you need it during higher interest rate periods. McDonnell advises pouring over loan documents to determine what rate changes will mean to your loan and your monthly payment. "Organize all original mortgage paper work, keep all of your monthly mortgage payment statements, and copies of related insurance and tax bills all in one place and create a resource reference file," she said. "If you have an adjustable rate see if you can understand how the adjustments are likely to work. The LIBOR ARM is going to create a lot of problems. Typically they are fixed for the first two to three years and then they go into adjustments every six months and that can be a real shock. The caps on the first adjustment can be high," McDonnell added. TrueLink.com, a TransUnion consumer Web site suggests consumers "stress test" their adjustable mortgage by calculating the potential monthly payments based on rates increasing both to the historical average of 7 percent and higher. If you can't afford the higher payment, consider refinancing now to lock in lower rates with a fixed mortgage. That could immediately push your mortgage payment higher, but it will avoid the risk of even higher payments should interest rates rise further next year. Likewise, consolidate as much debt as possible, especially higher-cost bank and retail credit card debt, provided you seal the deal with a promise to yourself to close those accounts for good. "It's probably a little early yet, I don't think rates have gone up that much yet, but refinancing is an option and you should act sooner rather than later if rates are going to go up," said Earl Peattie, vice president of Philadelphia, PA-based National Financial News Service. Peattie also said people who've opted for interest-only loans (which allow home owners to make monthly payments of interest only) and may also have been making principal payments, always have the option to pay only the interest. "That may get them by. The key is to understand how your loan works. Many people take out a loan and they sort of forget about it. Knowing how the new interest rate is calculated, taking a look at loan documentation is a good first step," Peattie said. McDonnell said to avoid the cost of a new loan, squirreling away extra cash to make higher mortgage payments is a good idea and the money can draw a few dollars in interest. She said Murphy's Law also applies to simultaneous increases in other home ownership expenses. "Increase your savings and create a cash cushion to anticipate increases. Also call your (property) taxing authority and insurance providers to see if there will be any increases there," McDonnell said. Copyright © 2004 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.