Homeowners feel pinch of mortgage rate

Robin Vinopal decided to follow the advice of a financial adviser five years ago when she bought a home in Kensington with an adjustable-rate mortgage.

Now she wishes she had ignored his advice.

“I just hit the first adjustment up, and it’s painful,” said Mrs. Vinopal, a director of operations for a College Park games manufacturer.

Like other borrowers who tried to save on monthly payments with an adjustable-rate mortgage (ARM) or interest-only loan, Mrs. Vinopal is finding that her payments are rising with interest rates.

ARM rates were lower by one percentage point or more compared with the traditional fixed-rate mortgages until about a year ago.

Interest rates on ARMs change with market fluctuations but stay the same on fixed-rate mortgages.

Although ARMs make up 25 percent of home loans nationwide, they accounted for 42 percent of mortgages last year, according to the Mortgage Bankers Association, a trade group for mortgage lenders.

They hit a height of popularity while interest rates were low during the housing boom, when home ownership hit a record 69 percent in 2004.

However, in some cases the American dream was built on unrealistic promises of easy loan-repayment terms.

Now the easy part of the loan is over as rising interest rates create bigger monthly payments.

“A lot of these borrowers are going to refinance into a new mortgage at this point,” said Mike Fratantoni, Mortgage Bankers Association senior economist.

Sixty percent of subprime loans, including some ARMs, are scheduled to have their interest rates reset by the end of the year, according to the community activist group Association of Community Organizations for Reform Now (ACORN).

Typically, ARM mortgages require the same payment for the first one, three or five years, then reset each year to reflect the most recent interest rates.

Increases in interest rates “pose a huge threat to the security of individual homeowners and entire neighborhoods,” ACORN said in a report on the risk subprime mortgages create for low- and middle-income households.

Mortgage lenders say they already are seeing their ARM customers returning to refinance.

“I’m getting a ton,” said Dominic Turano, Washington branch manager for Wells Fargo Home Mortgage, one of the nation’s largest mortgage lenders. “People have payments that have about doubled over the last two to two-and-a-half years.”

A three-year adjustable-rate mortgage for a $200,000 loan taken out in 2003 at a 4 percent rate would incur monthly payments of $955. If rates that include the lender’s profit stay around the current 7.6 percent level, the monthly payment would rise to $1,375, or 44 percent higher.

This month, Mrs. Vinopal received a letter from her mortgage company saying her monthly payments would rise $250 over the roughly $800 a month she has been paying.

“With my own lack of consumer awareness, I didn’t pay a lot of attention to the reasons behind it,” said Mrs. Vinopal, who said she was merely seeking the lowest loan payment possible when she took out the adjustable-rate mortgage. “At the time, it sounded good.”

If she knew how much the monthly payment would increase, “I would never have signed up for that in the beginning,” she said.

Mrs. Vinopal and her husband, a Georgetown University biology professor, are scrambling to refinance with a fixed-rate mortgage.

Thirty-year fixed-rate mortgages averaged 6.52 percent interest last week, according to mortgage investor Freddie Mac’s weekly rate survey. A year ago, they averaged 5.80 percent.

Five-year Treasury-indexed hybrid ARMs averaged 6.18 percent last week. They averaged 5.34 percent last year at this time.

Borrowers with interest-only loans and option ARMs run the greatest risk of higher payments. Interest-only loans allow borrowers to pay only the interest on their loans for the first five years or so. Option ARMs allow them to choose between making a minimum payment each month or paying down the principal, just like a credit card.

The risk that the required monthly payments will explode prompted the Federal Reserve to warn mortgage lenders to tighten their lending standards.

“Evidence indicates that the most recent borrowers into the market had little to no down payment, meaning they have little or no equity in their homes,” said Keith Leggett, senior economist for the American Bankers Association. “As their adjustable-rate mortgages re-price, they will experience sticker shock. This increases the probability of them defaulting on their mortgage.”

The number of properties entering foreclosure was 17 percent higher in June 2006 compared with one year earlier, the online marketplace for foreclosure properties RealtyTrac said in its most recent report on foreclosures.