Opportunity Seen Good to Switch Loans : Possibly Last Chance to Get Fixed-Rate Mortgage Before Rise

With mortgage rates down near the 10% mark and most economists predicting higher rates ahead, now may be an opportune time for homeowners to refinance their adjustable-rate loans with a fixed-rate mortgage.

The expected rate run-up, coupled with the narrowing gap between rates on fixed loans and rates on adjustables, also makes fixed mortgages a good choice for many home buyers as well as owners.

“There’s a window of opportunity right now if you want to refinance with a fixed-rate mortgage, but that window is closing fast,” said John Tuccillo, chief economist of the National Assn. of Realtors.

That “window” has resulted, in part, because rates on fixed mortgages have recently been dropping while rates on adjustable loans have not.

Smaller Differential

The average rate on new 30-year, fixed-rate mortgages is about 10.3%, with a few lenders offering them at 10%. Initial rates on adjustable-rate mortgages are averaging about 8.3%, according to Compufund, a Santa Ana-based computerized mortgage service.

Usually, experts say, ARMs are a borrower’s best choice when they’re at least 2 3/4 points below rates on fixed loans. A smaller differential between fixed rates and adjustable rates--such as the mere two-point difference of today--tends to make a fixed-rate loan more attractive.

However, borrowers who want to take advantage of these low fixed rates may need to move fast: Few economists think they’ll hover around the 10% level for long.

“I think you’ll see rates go to 11% or 11 1/2% by next spring, and then they’ll level off,” said Tuccillo. “But even a year from now, they won’t be as low as they are today.”

David Seiders, chief economist of the National Assn. of Home Builders, is even more bearish: He predicts rates will jump to 11 1/2% early next year and should reach 12% by mid-1989.

Fixed-Rate Security

The expected rate run-up could make this an ideal time for homeowners who have adjustable-rate mortgages to refinance with a fixed-rate loan, experts say.

Most of these owners have long since seen the low, introductory rate on the ARM disappear and are now paying between 9 1/2% and 10% on their adjustable-rate loans. If overall interest rates go up, so will the rate on the home loan.

These borrowers may be willing to refinance their existing 9 1/2% or 10% adjustable-rate loans with a new, 10 1/4% fixed-rate mortgage simply for the security of knowing that the rate on their new loan can never change.

“You’ve got to ask yourself, ‘Am I willing to pay an extra half-point or so for the security of having a fixed-rate loan?’ ” Tuccillo said.

“For a lot of people, the answer is ‘yes.’ ”

Of course, borrowers who swap their ARM for a fixed-rate loan may be sorry if rates start dropping again after the expected spring run-up.

They also need to consider how much refinancing will cost. Since refinancing entails paying hundreds or even thousands of dollars to set up the new loan, refinancing isn’t feasible unless the owner plans to stay in the property for at least a couple of years.

“It wouldn’t make sense to spend a bunch of money to refinance if you’re moving out next year,” Tuccillo said. “You have to stay around long enough to enjoy the benefits and justify the up-front money you laid out to refinance.”

Homeowners and home buyers who want to build equity faster and can afford to spend an extra $100 to $300 on their housing each month should give 15-year, fixed-rate loans special consideration.

Higher Payments

Rates on 15-year loans are currently averaging about 10%, according to Compufund. That’s about one-quarter of a percentage point lower than rates on 30-year loans.

A homeowner who takes out a $100,000 15-year loan at the current 10% rate would pay $1,075 a month in principal and interest payments. That’s $179 a month more than he’d pay if he borrowed $100,000 at the 10 1/4% rate common for today’s 30-year loans.

However, paying that extra $179 a month for the 15-year loan would cut in half the time it takes to own the house free and clear. Equally important, the borrower would pay about $60,000 less in finance charges over the life of the 15-year loan than he would if the loan lasted 30 years.

Rates Can Be Locked In

Mortgage shoppers hoping to take advantage of today’s low rates--whether it’s a 15-year or 30-year loan--should ask their lender for a rate “lock-in” agreement, said Michelle Meier, a lobbyist for Consumers Union in Washington.

“It’s a written commitment from the lender guaranteeing that the rate you’re quoted today will be the rate you get when the loan is eventually funded,” Meier said.

“If you don’t have a lock-in agreement and rates go up between now and the time the loan is actually made, you may wind up having to pay the higher rate,” she said.