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On the Safe Side: Professor Spots ‘Flight to Safety’ in Home Loans; Fixed Rates Gain in Popularity

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By Amy Hoak

RISMEDIA, June 18, 2007-(MarketWatch)-Borrowers are turning to safer mortgages in the second quarter, more likely to choose fixed-rate home loans and shy away from piggyback loans and exotic mortgages, real estate professor Susan M. Wachter said on Wednesday.

This “flight to safety” comes at a time when regulators and lawmakers are scrutinizing the home-loan industry and the overall awareness of high-risk loans is heightening, said Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School. She released her second quarter 2007 U.S. Mortgage Payment Index on Wednesday, an evaluation of mortgage products for consumers.

In a news release, Wachter reported that 89% of borrowers with one-year adjustable-rate mortgages refinanced into long-term, secure loans in the first quarter of 2007. More than 60% of all new mortgages originating in January were prime mortgages, she added.

In addition, loans with private mortgage insurance rose more than 55% in March compared with February. The mortgage insurance provider Genworth Financial Inc. supplies data for the index, Wachter said.

It is difficult to tell whether the jump in mortgage insurance use is due to a new tax break for the premiums, effective this year, or because borrowers are avoiding the less predictable rates of piggyback loans. Piggyback loans are home equity loans or lines of credit which fulfill the down payment of a first mortgage; piggyback mortgages often have variable rates that fluctuate based on the prime rate.

The index was created in order to present the options available to borrowers when deciding on a home loan and to show them not only what initial payments would look like but also what they’d be five years down the line, she said.

“We really don’t have this kind of simple information out there for borrowers to make informed choices,” she said during a telephone interview.

According to the index, a 30-year fixed-rate mortgage with monthly mortgage insurance currently costs $1,400.31 in the first month and costs $1,270.31 in the 61st month. A 30-year fixed-rate mortgage with single financed premium mortgage insurance is $1,309.05 and the same in the 61st month.

The combination of a 30-year fixed-rate mortgage and a home equity line of credit (HELOC) currently costs $1,328.19 in the first month and $1,434.86 in the 61st. The combination of a 30-year fixed-rate mortgage and a closed-end second loan is $1,328.30 in the first month and the same in the 61st.

The combination of a 10/1 interest-only adjustable-rate mortgage and HELOC currently costs $1,203.02 in the first month and $1,309.69 in month 61. The combination of a pay-option ARM and HELOC costs $800.17 in the first month and $1,824.49 in month 61. All scenarios assume a $200,000 loan amount with a 5% down payment.

For those currently stuck with risky and/or costly mortgages, Wachter says “the time to get out is now.” Those working to get out of an undesirable mortgage should take the following steps:

Try to raise your credit score above 620, the traditional cut-off point for prime versus subprime.

Consider refinancing into a fixed rate prime mortgage, which will eliminate rising payments.

Don’t sit still if times get tough. Lenders, mortgage insurers and nonprofits all offer workout programs to make sure that foreclosure is a last resort.

Amy Hoak is a MarketWatch reporter based in Chicago.

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