Home buyers more cautious on loans

By: CHRIS BAGLEY - Staff Writer | Saturday, April 8, 2006 8:55 PM PDT ∞

Home buyers in San Diego County and across the state are starting to back away from adjustable-rate mortgage loans, a trend that borrowers, lenders and real-estate professionals pin on rising interest rates, cautious borrowers and the cooling of California's real-estate frenzy.

Though adjustable-rate mortgages still account for just over half of all home loans, that marks a steep slide from last year, when three-quarters of home buyers used them. And though mortgage brokers say ARMs are still the best choice for some buyers who don't plan to stay put for long, many buyers also acknowledge that a changing real-estate market makes floating rates a lot riskier than they used to be.

In February, only 53 percent of San Diego County home buyers used adjustable-rate mortgages to finance their purchases, compared with 73 percent in November and 80 percent in February 2005, according to report by La Jolla-based DataQuick Information Systems, which found similar numbers for Riverside County and for the state as a whole.

The shift is buyers' way of handling new risks, according to buyers and mortgage brokers interviewed in the last few weeks.

Among buyers who are financially stretched, rising home values don't provide the safety net that they did year or two ago.

A homeowner who is squeezed by rising mortgage payments can still come out ahead if a sale produces enough cash to pay off the mortgage. But fewer owners can do that now, compared with a year ago. The median home price in San Diego County rose 6 percent from February 2005 to February 2006, to $502,000, compared with a 16 percent rise in the previous 12 months.

Without that cushion below them, fewer home buyers are risking the fall.

And with mortgage rates finally starting to creep back up, more borrowers worry that some adjustable-rate mortgages could end up saddling them with unmanageable payments, once the initial period of fixed payments expires. The average rate on one-year adjustable mortgages has risen to 4.97 percent, from 3.85 percent a year ago, according to a survey last week by BankRate.com.

Even the adjustable-rate loans that do remain popular now tend toward the conservative, according to Dan Auld, a loan officer with Coldwell Banker Mortgage in Wildomar. Auld said his borrowers are taking out fewer one- and three-year adjustable loans.

"They're being more conservative and getting a longer fixed-rate period," such as five or seven years, Auld said.

One of Auld's clients said she and her husband used a fixed-rate mortgage to buy a house in Temecula in late February. The couple swore off adjustable-rate mortgages in 2001, when monthly payments on the loan got out of hand and forced them to sell their house in Huntington Beach.

The pair still came out ahead, since the house had appreciated significantly in the two years they had owned it. But home buyers these days can't count on that kind of rescue, real-estate professionals said.

The narrowing gap between fixed interest rates and adjustable interest rates is also making ARMs less attractive to many borrowers, said Kendra Parda, a broker with Beach & Inland Mortgage Service in Carlsbad.

A year ago, the average rate on one-year adjustable-rate loans was 1.9 percentage points lower than the average rate on a 30-year fixed jumbo mortgage, according to BankRate. That gap has narrowed to 1.16 points.

On the other hand, not all borrowers focus so heavily on interest rates, said Ken Corioso, a mortgage broker with Inland Empire Financial in Temecula. Many continue to focus mainly on the mortgage payment they'll have to make every month, Corioso said. And since most ARMs still allow lower initial payments than fixed-rate mortgages do, Corioso said his clients choose ARMs at least as often as they did a year ago.

The overall decline in ARMs' popularity may also have something to do with a rise in what's known as the "conforming-loan limit," said John Karevoll, DataQuick's senior analyst.

The limit is set by Freddie Mac and Fannie Mae, two federally chartered corporations that buy mortgages from lenders and resell them by the thousands to investors. The two companies now buy and resell mortgages as large as $417,000, though they excluded mortgages of less than $360,000 before year's end.

A mortgage lender typically offers a lower rate on a mortgage that it can resell to such companies, since it will bear less of the risk that the homeowner will default. Because mortgages below the limit are more likely to have fixed interest rates than mortgages above the limit, Karevoll said, the higher limit steers more home buyers toward fixed-rate mortgages.

Contact staff writer Chris Bagley at (760) 745-6611, Ext. 2615, or cbagley@nctimes.com.