Interim Mortgage Rate Rise Predicted : But Second-Half Slowdown Could Push Percentage Back Down by End of the Year

A strong economy will push mortgage interest rates up about one full percentage point by mid-1989, many economists say, but a second-half slowdown will push them back down near today’s level by the end of the year.

The expected rate increase over the next six months could force some homeowners to make difficult decisions about buying a new home or refinancing, and would undoubtedly make it harder for first-time buyers to purchase a house.

Rates seem almost certain to rise, experts say, because the economy is growing at a relatively strong rate. That growth puts upward pressure on everything from wages to retail prices, thus quickening the pace of inflation and raising interest rates.

Temporary Rate Rise

To slow the economy and dampen prospects for a long-term bout with inflation, the Federal Reserve Board will likely be forced to raise one or more key rates, such as the rate it charges on loans to banks. But while that may relieve long-term inflationary pressures, it would also lead to an immediate, temporary rise in mortgage rates.

“No matter what happens, it looks like rates have nowhere to go but up for the next six months or so,” says David Seiders, chief economist of the National Assn. of Home Builders.

Fixed-rate, 30-year mortgages currently average about 11%. If rates rise to 12%, the monthly payment needed to amortize a $100,000 loan would rise by $77 to $1,029 from $952.

Most homeowners don’t have to worry much about rising rates. “If you have a fixed-rate mortgage, you’ve already locked in your payments and higher rates won’t hurt you,” says Joel Singer, chief economist of the California Assn. of Realtors.

“If you have an adjustable-rate mortgage, your payments are probably going to go up for awhile, but the value of your home will be appreciating, too. Either way, there’s no real cause for alarm.”

But it’s a different story for first-time buyers, as well as for homeowners who want to refinance their current mortgage or “trade up” to a larger home with a bigger loan.

First-time buyers will find that the expected rate increase--coupled with rising prices--means they will have to settle for less if they want to own their own home.

“First-time buyers are going to have to continue to look in outlying areas where homes are less expensive, or they’ll have to settle for a condominium or smaller house that’s closer in,” Singer says. “The only alternatives are to look for (cheaper) homes that they can fix up, or to delay their home-buying plans until they’ve saved more money.”

Homeowners who are thinking about refinancing their current loans also face some tough choices. If their financial situation demands that they refinance now, they’ll need to act quickly before rates move any higher.

If there is no pressing need to refinance, these owners may want to wait on the sidelines. Many economists say rates will end the year about where they started, and may move even lower in 1990.

Some experts say the current interest-rate forecast makes “convertible” mortgages a good choice for many borrowers, regardless of whether the money will be used to buy a house or refinance an existing loan.

Convertible loans are technically adjustable-rate mortgages. However, many start out with a below-market rate that will last for several months before it’s adjusted upward. In addition, the borrower can convert the loan into a fixed-rate mortgage during a specified period of time, usually between the end of the first year and the start of the sixth.

If the predictions of many economists prove correct--that rates will rise in the first half of the year, and fall in the second--consumers who take out a convertible loan today may get the best of both worlds.

First, they’ll benefit from the convertible loan’s low introductory rate in the early months, even if overall rates are rising. And if rates fall toward the end of the year, they’ll have the option of keeping the adjustable rate and riding the downward trend, or converting to a fixed mortgage if they think rates have bottomed out.

Better Off on Sidelines

Higher rates would also make it more important for consumers to check with several lenders before they take out a loan. “There are almost always a few lenders around that are offering lower rates than the rest of the group, especially in the adjustable-loan market,” Seiders says.

In short, consumers who don’t have to enter the mortgage market in the first half of this year may be better off staying on the sidelines and counting their blessings. At worst, it appears interest rates will end the year about where they’re starting, and they could go even lower in 1990.

Those who can’t wait until the expected interest-rate runup is over will have to move with caution. Many economists, including Seiders, predict there will be a recession in the second half of this year; several others say a downturn will come in 1990.

“Make sure you’re comfortable with the outlook for your job situation and, if you’re part of a two-earner couple, that you’re also sure about your spouse’s job,” advises Seiders.

“If you might lose your job later this year, you sure don’t want to jump in the market now just to save yourself a point or so on your mortgage rate.”