Date     October 29, 2005
Time     09:30 AM - 10:00 AM
Station     CNN
Program     Open House

GERRI WILLIS, host: Homeowners, your budget is about to take a double hit if it hasn't already. Watch out for higher heating bills and mortgage rates. Good morning. I'm Gerri Willis. Today on Open House, we'll show you how to fight back, and what you should do now to get your budget in line.

First, interest rates are nearing their highest levels in a year, and projected to go even higher. Now, if you have an adjustable rate mortgage, I'll show you why now is the time to think about locking that interest rate with a new loan. We've been monitoring four new developments this week that can make a very big difference to your mortgage rate.

One, the Mortgage Bankers Association now predicts new mortgage rate hikes with adjustable rate loans the biggest. The MBA says the one-year adjustable rate will rise to 5.4 percent by the middle of next year. That means if you got a $250,000 one-year adjustable rate mortgage, just last year at 3.9 percent, you are paying $1,179 a month.

But next year, at 5.4 percent, you'll be paying more than $1,400 a month. That's a difference of $2,700 a year. Two, fixed-rate mortgages are doing no better.

The 30-year fix topped the 6 percent mark for two weeks in a row. That hasn't happened since June of last year. It means, right now, a $250,000 30-year mortgage is costing you $2,000 a year more than it would have cost in 2004.

Mr. MIKE MANDEL (Chief Economist, Businessweek): You can see the interest rates rising, making stuff more expensive for people. You can see there's a lot more people out there precariously balanced on the edge in terms of what they can afford. That's not a good state for the housing market to be in.

WILLIS: Three, a warning over interest-only loans. FDIC Chairman Don Powell told bankers recently, housing boons don't last forever. He said that may mean too much risk for holders of nontraditional mortgages like interest-only products.

Four, President Bush's replacing Federal Reserve Chairman Alan Greenspan with Ben Bernanke of the Council of Economic Advisors. There's some speculation he'll be more of a by-the-book chairman than Greenspan. That could a few more interest rate hikes than we might have seen before.

So, what can you do if you're faced with mortgage payments that are much more than you bargained for? Joining me now is Bob Moulton, president of Americana Mortgage Group. Bob, good to see you.

Mr. BOB MOULTON (President, Americana Mortgage Group): Good to see you too, Gerri. Thank you.

WILLIS: You know, seven straight weeks of mortgage rate hikes. I think people are getting very nervous, particularly those people in adjustable rate mortgages who are facing a scenario where their rates could go higher. What should they do now?

Mr. MOULTON: Well, if they've been in the home for several years, and they had a three-year adjustable rate mortgage, or a five-year adjustable rate mortgage, they should refinance into a fixed-rate before they get up around the 7 percent level.

This would give them the security of the fixed-rate payment that they deserve, particularly if they're going to stay in the house for at least another three or five years, or even longer.

WILLIS: So, it's all about how long you're going to be in the house, right?

Mr. MOULTON: Absolutely. It wouldn't pay to refinance if they're only going to stay in the house for a couple of years. So, they have to take a look to see how long they're going to stay in the house. That would make the most sense for them.

WILLIS: And that two years, you say, is really the tipping point, right?

Mr. MOULTON: It's tough to recoup the closing cost if you're only going to say in the house for two years. So, it's worth taking an interest rate risk, and not spending the money on the closing costs.

WILLIS: You bring up closing costs. What proportion of the value of your mortgage is closing cost?

Mr. MOULTON: Generally, closing costs run about 3 percent of the amount that you're going to borrow. There's title fees, attorney fees, appraisal fees, and things like that. So, when you do the cost benefit analysis, you have to see how much money you're going to save on a monthly basis. Divide that into the closing cost. That will give you your break-even point.

WILLIS: So, given the average home was about $220,000, we're talking a chunk of change here, thousands of dollars in fact. Let's talk about people who are shopping for a home now, and looking for a mortgage. What's your recommendation to them?

Mr. MOULTON: It depends, again, how long you're going to stay in the house for. With house prices appreciating at double digits the last five years, some perspective homeowners are stretching their borrowing power by still going into interest-only mortgages.

What's become very popular over the last few months are 40-year mortgages. So, the 40-year mortgages can save the homeowner 10 percent per year, 10 percent per month. It's safer than an interest-only mortgage. It will amortize over 40 years as opposed to 30 years.

WILLIS: And you'll be paying well into retirement, I guess. It seems to me like it would be better just to find a cheaper house than to spread your payments over 40 years.

Mr. MOULTON: Well, when homeowners go out shopping, and they see what they can afford and they see what the house is that they can pay for, they always have a little more expensive taste, but can't necessarily afford it at that time.

What they take into consideration is where the income will be a few years from now. So, they're willing to take the risk. They're willing to look at the adjustable-rate mortgage and grow into the house.

WILLIS: It's hard to tell though where your income's going to be. You bring up a great point here, which is that people have been going into really riskier mortgages.

We've heard a lot of criticism lately from regulators saying that the industry should do more to keep people from going into these mortgages. Are you guys prepared for the kinds of foreclosures you might see if rates were really to spike?

Mr. MOULTON: Well, if rates really spike, what happens at the end of the term of these interest-only mortgages, or adjustable-rate mortgages, they're going to be tied to an index. They're going to have a margin. Their rates could be fully indexed, 6, 7, or 8 percent.

If they don't have the income to carry that, we might see a softening in real estate prices. You might see more foreclosures. You're going to see mortgages with derogatory credit become more popular. So, we are getting ourselves prepared for that market right now.

WILLIS: Well, I think that we've maybe gotten into mortgages that are a little riskier than we need at this point, certainly with interest-only mortgages. Those people could really be in trouble.

And certainly the option ARM people where they don't even have to pay all of their monthly interest costs. People like that really need to opt for safety right now. Don't you think?

Mr. MOULTON: I do. I think the people that do take the option-only mortgages--I was reading some statistics. Seventy percent of those people defer the interest. Seventy percent of them make the minimum payment.

If they can't pay extra principle, they should do it while they can. Same thing with the interest-only mortgage. If they can make extra principle payments, they should do that to avoid the risk at the end of the time period.

WILLIS: All right, Bob. Thanks for being with us today.

Mr. MOULTON: Thanks, Gerri.