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Fiscal tremors are felt as rates rise

Many choose adjustable mortgages over fixed

As mortgage rates climbed for the fifth straight week, an index measuring refinancing applications slumped to its lowest level since January and fell well off the peaks of a year ago, when mortgage rates flirted with historic lows.

Applications for mortgages on new home purchases rose slightly, however. And consumers applying for either a new mortgage or a refinancing of an existing loan are more likely than a year ago to opt for an adjustable-rate mortgage than one with a 30-year fixed rate as they look to keep near-term monthly payments as low as possible, mortgage brokers said.

The average rate on a 30-year fixed mortgage rose to 5.94 percent this week, its highest level since early December and up from 5.89 percent a week ago, Freddie Mac, the second-largest purchaser of US mortgages, said yesterday. Signs that an economic recovery is underway are pushing up bond rates, causing long-term mortgage rates to rise, as well.

At First Service Home Mortgage in Westwood, refinancing this month is off by 25 percent from the same period a year ago, said president John Brodrick.

"People are still refinancing," he said. "But the purpose is different from the feeding frenzy of a year ago."

In May and June 2003, people were chasing after low rates, sometimes refinancing multiple times. Now refinancing tends to be motivated by a specific event, such as cashing out some equity to pay for a child's college tuition, he said.

Yesterday, Brodrick said he talked to one client who explored selling his house because he wanted to trade up to something larger. But partly discouraged by the high home prices, the client is now deciding whether to stay put, refinance his mortgage, and build an addition to his current home.

Perhaps it was inevitable that the pace of refinancing would slow once rates began to climb because so many consumers have refinanced over the past two years.

"You can only go to the well so many times," said Jim Flynn, president of Marathon Mortgage Co. in Hopkinton.

Nervous about jobs, some people are refinancing from a fixed-rate mortgage to an adjustable rate mortgage because it means lower monthly payments in the initial years of the loan, he said.

According to the Mortgage Bankers Association, US mortgage loans are now projected to fall by 32 percent to $2.57 trillion in 2004 from the record of $3.8 trillion set last year. For the week ended April 16, the group's index for home purchases rose 0.4 percent from the previous week; its refinance index fell 10.9 percent for the same time frame. For the week, adjustable-rate mortgages accounted for 31.7 percent of total applications, up from 29.4 percent the week before.

A year ago, East-West Mortgage Co. of Peabody was seeing "refinance junkies," consumers who were refinancing every six or seven months as rates fell, said John F. Gallagher, East-West's chief executive. That customer has largely vanished.

But some homeowners will continue to refinance even as rates go up.

"If you need a new roof, you need a new roof," he said.

Meanwhile, the US Census Bureau said yesterday that the national homeownership rate was 68.6 percent in the first quarter of 2004, the third straight record quarter on a seasonally adjusted basis. The data indicate that there were 1 million more homeowners in early 2004 than in the same period in 2003.

Chris Reidy can be reached at

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