Is Greenspan Right About Your Mortgage?; As Industry Pushes ARMs, Fed Chief's Speech Underscores Savings and Possible Risks
THIS WEEK, no less an authority than Federal Reserve Board Chairman Alan Greenspan suggested that many Americans may have the wrong mortgage.</br></br>In a speech to credit unions, Mr. Greenspan said that Federal Reserve Board research showed that "many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade" as rates tumbled.</br></br>Yet the more expensive fixed-rate loans accounted for 81% of mortgage originations last year, according to the Mortgage Bankers Association. That's because most borrowers are risk-averse and fixed- rate mortgages protect them from the possibility that interest rates will rise over the life of the loan.</br></br>The problem is that as home prices soar, choosing a long-term loan is an increasingly costly decision. In the current market, borrowers can cut the rate on their mortgage drastically by opting for an adjustable-rate mortgage instead of a 30-year fixed-rate loan. Currently, rates average 5.71% on 30-year fixed-rate mortgages while they average just 4.53% on mortgages that carry the same rate for the first five years and then adjust yearly, according to HSH Associates, a financial publisher.</br></br>Lenders are increasingly pushing ARMs because they allow buyers to either trim their payments or buy more home for the same payment. At Washington Mutual Inc., ARMs accounted for 55% of home loan applications in the fourth quarter. At a time of rising home prices, the lower start rates on ARMs allow borrowers "to maximize their buying power," says Greg Sayegh, Washington Mutual senior vice president.