Mortgage rates hit six-month high

Mortgage rates have soared to their highest this year. Refinancers have slammed on the brakes because of the abrupt rise, and borrowers soon might shift into adjustable-rate mortgages.

The benchmark 30-year fixed-rate mortgage rose 30 basis points, to 5.95 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.42 discount and origination points. One year ago, the mortgage index was 6.52 percent; four weeks ago, it was 5.21 percent.

The 30-year fixed is at its highest rate since the week of Thanksgiving, when the benchmark rate averaged 5.97 percent.

A little over two weeks ago, lots of borrowers could get mortgages at less than 5 percent by paying a discount point -- prepaid interest equal to 1 percent of the loan amount. Now some borrowers have to pay discount points just to get below 6 percent.

Also in Bankrate's weekly survey, the benchmark 15-year fixed-rate mortgage rose 31 basis points, to 5.37 percent. The benchmark 5/1 adjustable-rate mortgage rose 29 basis points, to 5.49 percent.

Higher rates have reduced the number of homeowners who find it worthwhile to apply to refinance their mortgages. According to the Mortgage Bankers Association, or MBA, refinances made up 59.4 percent of mortgage applications last week -- the lowest refinance share since November.

"There's definitely a percentage out there who have missed the (refinancing) boat, and I don't see it going back, frankly, to the lows we had," said Brian Koss, managing partner for Mortgage Network, a lender based in Westford, Mass.

Koss doesn't rule out the possibility that rates will fall, in other words, but he doesn't think they'll plunge back to the low 5 percent range. "We've told customers, 'Hey, let's pick a number where you could at least say it's worth doing, and if it hits that, don't ask me if I think it will go lower. I have no idea. Just grab it and go.'"

That advice is echoed by others, including Michael Becker, mortgage consultant for Green Pastures Mortgage & Finance in Lutherville, Md. "Part of me said the market got ahead of itself and will come back, but I'm not sure it'll come back all the way," he said.

Becker said he feels bad for people who want to refinance under the Obama administration's Making Home Affordable plan but were forced to wait because they have loans with mortgage insurance. Lenders have been telling those customers to wait. If rates don't fall, a lot of these borrowers might have lost their refinance opportunity.

There's another option: "We might even be back to looking at adjustable-rate mortgages," said Bob Moulton, president of American Mortgage, based in Manhasset, N.Y. He said some borrowers should consider the 5/1 hybrid ARM, in which the initial rate is fixed for five years, and then is adjusted annually.

Bankers say ARMs got a bad rap in the mortgage debacle. The riskiest loans -- subprime, low down payment, interest-only, negative amortizing and stated income -- tended to be ARMs. The mortgage meltdown occurred because those loan features were layered on top of ARMs. In many cases, the adjustable rates didn't get borrowers into trouble; people defaulted on their loans because they didn't put any money down and they exaggerated their earnings when they applied for stated-income loans.

A few months ago, only about 1 percent of mortgage applications were for ARMs. Last week, it was 3.4 percent, according to the MBA.

Koss said: "If you are buying, it is an opportunity to look at five-year adjustables again." The 5/1 ARM isn't for everyone. Koss and other bankers are quick to make that point. But they say that for people who make sizable down payments or have plenty of equity, and who expect to sell within five or six years and could handle a rate increase five years from now, 5/1 ARMs shouldn't be dismissed out of hand.

The monthly savings can be substantial for a big loan. Take someone borrowing $350,000. On a 30-year fixed-rate loan at 6 percent, monthly principal and interest would be $2,098.43.On a 5/1 ARM at 5.5 percent, the monthly principal and interest would be $1,987.26. That's monthly savings of $111.

In this hypothetical example, it's probable that the ARM's rate would rise above 6 percent after the five-year anniversary, boosting the monthly payment above that on the 30-year fixed. That's why lenders are don't recommend 5/1 ARMs to people who are confident that they'll remain in their homes well beyond five years.