Vicki Bont, who is moving to Wichita from Chicago, wanted to do something creative when buying a new home this summer, she said.
So, instead of taking out a traditional 30-year fixed-rate mortgage, she and her husband applied for an adjustable-rate mortgage.
Not only is the adjustable loan a novelty for the Bonts, but it will save them money, which the family can use to repay the loan early.
“This is our fourth home. All our previous mortgages were at fixed rates,” Bont said. “Now I’m kind of asking why.”
So are hundreds of other home buyers. Since the Federal Reserve began raising short-term interest rates in early February, more home-mortgage applicants are requesting adjustable-rate mortgages.
Six months ago, only about 15 percent of home-loan applicants at El Dorado-based Mid-Continent Federal Savings Bank in Wichita asked for adjustable-rate mortgages, said thrift President Richard Pottorff. Today, roughly half want adjustable-rate loans, he said.
Other lenders, including Wichita-based Railroad Savings Bank and Fidelity Savings Association of Kansas, report a similar shift in demand.
As interest rates continue climbing, the preference for adjustable-rate mortgages will persist, Pottorff said.
“People are willing to take a chance on adjustable rates. And I think it’s a good chance,” he said.
Adjustable loans carry initial interest rates that are typically 2 to 3 percentage points lower than those of fixed-rate mortgages.
The adjustable rates are tied to an index, such as the interest rate on one-year Treasury bills, which changes with the market for money.
If the adjustable rate remains low, a borrower can save thousands of dollars over the life of the loan. But if the rate rises soon and substantially, the borrower would have saved by going with a fixed-rate loan.
Interest rates on 30-year, fixed-rate mortgages averaged 8.72 percent for the week ending July 15, up from 8.68 percent a week earlier, according to a national survey by the Federal Home Loan Mortgage Corp.
The average adjustable loan was going for 5.58 percent. Before the Federal Reserve started pushing up short-term rates in February, fixed loans averaged 6.89 percent and adjustable loans 3.97 percent.
The monthly payment on a $65,000 adjustable loan at 5.58 percent interest would be $372, assuming payments are made over 30 years.
The monthly payment on a $65,000 fixed-rate 30-year loan at 8.72 percent interest would be $510. In short, the adjustable loan is $138 a month cheaper-as long as the rate doesn’t climb.
But even if the adjustable rate rose 2 percentage points to 7.58 percent, the monthly payment would be about $52 a month less on a $65,000 loan.
The Bonts, who expect to close the deal on their new home in August, will take the savings they’ll realize by going with an adjustable loan and “dump the money into the principal,” Vicki Bont said.
That will reduce the amount of money on which they owe interest. As a result, even if their interest rate eventually rises to 10 percent, the Bonts figure their monthly house payment will never be as high as it would be under a typical fixed-rate mortgage.
Wichita Realtor Sharon West, who is working with the Bonts, said many of the home buyers she has served in recent months prefer adjustable loans because they hold jobs that require periodic transfers.
“If you’re only going to be in the house a few years, it makes sense to have an adjustable rate,” West said.
That advice applies to most home buyers, said Gregory Ek, chief lending officer at Fidelity Savings.
“I would recommend the customer not go for the traditional 30-year fixed mortgage because most households-unless they are buying the house to retire in-will move over the next 7 years.”
With that in mind, Fidelity and many other mortgage lenders offer some adjustable loans that remain fixed until the seventh year of the life of the loan.
The difference in monthly payments suggest another advantage of the adjustable loan. The adjustable loan’s lower monthly payment allows the borrower to qualify for a bigger loan, Ek said.
Despite such considerations, adjustable loans can be tricky, said Douglas Starkweather of Railroad Savings.
“There are some basic things you really have to know before you get one,” he said. The most important features are the index, caps and margin.
The index is the interest rate to which the loan is linked. Railroad and Fidelity tie many of their adjustable loans to the one-year Treasury bill, which was at about 5.5 percent recently. Some loans are tied to the 11th Federal Reserve District’s cost of funds.
The margin is a fixed amount that the lender adds to the index rate. The resulting figure is the interest rate the borrower actually will pay for the loan.
If the index rate is 5.5 percent on the day of an adjustment and the agreed-upon margin is 2.75 percentage points, the new interest rate will be 8.25 percent.
“The margin you get will depend on your goals,”said Kaye Brown, Wichita regional lending manager for Capitol Federal, adding that as a rule, the higher the margin, the lower the maximum interest rate that can be charged on the loan.
The maximum interest rate is called the cap. Many adjustable loans carry a two-step cap.
The rate on the Bonts’ loan, for example, can’t rise more than 2 percentage points a year.
The loan is capped in another respect as well: The bank can’t raise the interest rate more than 6 percentage points over the life of the loan.
Consumers who opt for adjustable rates should determine the worst-case scenario-keeping in mind the length of time they plan to stay in the home-before settling for a particular mortgage.
But consumers also should keep in mind that, from a historical standpoint, fixed-rate mortgages remain a bargain, said Railroad Savings’ Starkweather.
