- The Washington Times - Wednesday, December 1, 2004

Q: I work as a loan officer in Maryland, and I have written a lot of mortgages with monthly adjustable rates.

These rates are now beginning to rise, and my clients are calling me and asking why their rates are going up.

I’m not sure what to say to them because they knew at the time that their mortgage carried an adjustable rate.

Do you have any idea where the market is headed and what I should tell my clients?

A: The first thing a good loan officer should do is lay out the “menu” of available mortgage programs for his client.

Typically, this will include monthly adjustable-rate mortgages, “interim” ARMs that have an initial fixed period and fixed-rate mortgages. The menu can also include loans with 15-, 30- or 40-year amortization periods as well as interest-only payment options.

The loan officer needs to explain each program in detail, outline the advantages and disadvantages, etc. In other words, the client must fully understand each program.

The next step is to help the client establish his particular objectives. For example, one client’s priority might be to pay off the loan as soon as possible, even though such a plan would result in a high monthly payment.

Another client might tell you that he is likely to sell the house within five years. Yet another client may want the lowest payment because his three children are entering college.

Once you have ascertained your client’s objectives, you can then make professional recommendations about mortgage programs that best suit the objectives.

As long as you carefully consult with each client in this manner, they should have no surprises. In fact, I have recommended monthly ARMs many times over the last couple of years to my clients, and I continue to do so.

These adjustables, such as those tied to the London Interbank Offering Rate, or LIBOR, were as low as 2.75 percent.

But it should be a surprise to no one that these programs have increased lately. Short-term rates are heavily influenced by the actions and policies of the Federal Reserve Board. And the Fed has been open and forthright to the public about its intentions to slowly increase these short-term rates.

Let’s look at where some of these rates are.

I see that the one-month LIBOR index was carrying a rate of 2.12 percent heading into the Thanksgiving weekend. Back in April, the LIBOR rate dropped as low as 1.09 percent. So we’re talking about a little more than a 1 percent increase in the past seven months.

In order to determine the actual mortgage rate, you must add a “margin” to the LIBOR index. A typical margin might be 2 percent, so the mortgage rate bounced from 3.09 percent in April to 4.12 percent today.

In my mind, that’s still a pretty good rate.

But the question of the future remains: How much more can we expect these adjustables to rise?

The Fed has already made several rate increases. Most analysts believe two or three more are in the cards. If so, expect monthly adjustable-mortgage rates to follow.

What should you tell your clients? Evaluate their situations again. For those who have changed their objectives and prefer a fixed rate, run the numbers on a zero-cost, fixed-rate refinancing loan.

My guess is that most ARM holders will choose to stay put. These rates could rise a bit more, but they are not likely to skyrocket.

I can tell you that I have a monthly adjustable on my house and I’m staying put.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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