Keith and June Forstrom reaped the benefits of adjustable-rate mortgages during the last few years. But now they’ve traded in their one-year ARM, with monthly payments of $1,060, for an old-fashioned 30-year fixed-interest loan.
The Forstroms refinanced out of the interest-only loan of $203,000 last month on their two-bedroom patio home in a gated community in Broomfield. They chose a 30-year fixed loan of $125,000 with a slightly higher rate. The loan was smaller because they used cash from the sale of another home they owned in Boulder County.
Now they’ll have more predictable monthly payments of $933.
“We realized that rates could very well go up, and we didn’t want to be stuck with that,” said Keith, 75, a retired real-estate broker.
Some homeowners who rushed into ARMs during the last five years – taking advantage of some of the lowest interest rates in decades – are now converting those loans as their rates adjust upward.
Interest rates on 30-year fixed loans are close to or higher than rates on some ARMs that are resetting after an initial fixed-rate period.
The Mortgage Bankers Association reported Wednesday that the gap between the average interest rates on a 30-year fixed loan (6.18 percent) and an ARM with a one-year fixed rate (5.9 percent) is the narrowest it has been since January 2001.
In recent months, bond investors anticipating an economic slowdown have driven down long-term rates used to set 30-year fixed rates.
Meanwhile, ARMs have risen more quickly as the Federal Reserve has lifted short- term rates since mid-2004. ARMs, whose rates typically rise after three to seven years, have declined as a share of all refinancings, according to the mortgage bankers group.
“A lot of people are going to feel the full effect of all these rate increases when their mortgages reset,” said Greg McBride, senior financial analyst for Bankrate.com, based in North Palm Beach, Fla.
Not everyone, however, thinks refinancing out of an ARM makes sense now.
Broker Mike Thomas of Hyperion Capital Group in Aurora said most ARMs have a cap restricting how much the interest rate can rise in one year.
Rates were so low in 2003 and 2004 that most three-year ARM rates being reset are still under 6 percent. Borrowers may be better off staying with their ARM and seeing what the Federal Reserve does with rates during the next 12 months.
“Sometimes it’s better to ride it out and wait,” he said.
Overall, mortgage-lending activity has fallen 21 percent during the last year. And the trend away from ARMs is being fueled in part by mortgage brokers. Many ads tout 30-year rates rather than the low ARM rates.
“I don’t remember the last time I sold an ARM,” said Tim Glaser of 1st Community Trust Mortgage in Greenwood Village, who refinanced the Forstroms.
Some brokers are calling former clients offering to get them out of their ARMs.
David Hutton, sales manager with Paragon Mortgage Services in Denver, recently persuaded Lakewood homeowner David Anderson to refinance by showing him he could save $200 a month.
Anderson said the monthly payment on his option ARM started at about $1,200 in early 2004 but is now nearly $2,000. Hutton arranged for a 30-year fixed loan that will reduce Anderson’s payment to roughly $1,800, including a one-time $1,200 prepayment penalty on his old loan.
“The adjustable rate was real good for us at the time, but it’s gone up,” Anderson said. “Who knows where it’s going to go from here?”
Staff writer Greg Griffin can be reached at 303-954-1241 or ggriffin@denverpost.com.
