Locking in a superlow mortgage rate: if you fit one of these profiles, ditch the 30-year loan for a cheaper variety

Kiplinger's Personal Finance Magazine,  July, 1998  by Joan Goldwasser

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Home buyers and refinancers can still get a 30-year mortgage at 7% without paying a mint in closing costs. (For good deals, check the tables on the next page--or, for more cities, point your Web browser to www.kiplinger.com and click on "Yields & Rates.") But if you fit one of the following profiles, consider ditching the 30-year mortgage for an even cheaper alternative:

* You're moving within five years. Lenders offer a variety of intermediate-term, adjustable-rate mortgages (often called hybrid mortgages). With such mortgages, the rate is fixed for three to ten years and then the loan turns into a one-year ARM.

With three- and five-year rates almost identical, 5/1 ARMs (fixed for the first five years) are the better deal now. Countrywide Lending (800-570-9888; www.countrywide.com) offers a 5/1 ARM at 6.88% with no discount points (a point equals 1% of the loan amount) and no origination fees, and an even lower rate if you pay points. The monthly payment for a $150,000 mortgage would be $980.

Just in case you keep the loan for more than five years, check the details of the conversion. The most commonly used benchmark for ARMs is the Constant Maturity Treasury index, to which lenders add a margin of 2.75 to 2.88 percentage points. Make sure the rate is capped. For example, Norwest has a lifetime cap of five percentage points, but it can impose that hike all at once, at the first adjustment. Countrywide has a more typical two-points-per-year adjustment, and a lifetime cap of six points.

Also, you don't want to have to requalify for the loan, and you don't want to make a balloon payment. Ask if you can prepay your loan without penalty. On the other hand, agreeing to a penalty can lower your interest rate by 0.25 percentage point.

* You can afford higher monthly payments. Try a 15-year fixed-rate mortgage. Rates (recently 6.75%, on average) are about one-third of a percentage point lower than on 30-year loans. On a $150,000 mortgage, your monthly principal-and-interest payment would be $1,327, versus $1,008 with a 30-year mortgage at 7.1%. But you'd pay $124,000 less in interest over 15 years than over 30.

* You need a rock-bottom rate to qualify for a loan. You can't find a lower rate than the one-year adjustable-rate mortgage. The national average rate for a one-year ARM was recently 5.7%, which brings your monthly payments on that $150,000 loan down to $871. Trouble is, the rate on a typical ARM with a two-percentage-points-per-year cap will adjust to 7.7% the second year. If you have the cash, consider buying down a fixed rate by paying more points up front--you'll pay less interest in the long run.

How Does Your Bank Rate?

At the same time that banks are reducing or waiving fees on checking accounts for customers who commit to using more of the banks' products, they are also trimming checking fees for those who agree to use fewer services--for example, avoiding contact with tellers, according to a recent survey by Bank Rate Monitor, a North Palm Beach, Fla., provider of financial-product information.

Other highlights from the survey:

* The average monthly service charge for non-interest-bearing checking accounts fell 8%, to $5.81, since the last survey, in October 1997. The service charge for interest-bearing accounts fell 2%, to $9.16.

* The percentage of institutions that charge noncustomers to use their ATMs rose from 48% to 55%.

* When Bank Rate Monitor priced basic checking accounts, none of the 50 largest institutions showed up among the ten least-expensive accounts. Community banks and thrifts made up the honor roll.

RELATED ARTICLE: Top-Yielding Money-Market Mutual Funds

YIELDS on tax-free money funds jumped in the past month, but don't rush to stash your cash in a muni fund. Each spring, investors tap the funds to pay taxes, and the funds sell securities to raise cash. Prices of the securities fall, and yields rise. Traditionally, yields drift back down by summer.

                        RECENT       MIN.
Taxable               30-DAY YIELD   INVEST.   WEB ADDRESS (WWW.)
1. Strong Step 1(*)     5.70%        $1,000     strong-funds.com
2. Kiewit(*)            5.42         10,000       kiewit.com
3. AON(*)               5.40          1,000           --
4. TIAA-CREF            5.35            250       tiaa-cref.org
5. Marshall(*)          5.33          1,000     marshallfunds.com
   NATIONAL AVERAGE     5.00%

                        TOLL-FREE
Taxable                  NUMBER
1. Strong Step 1(*)     800-368-3863
2. Kiewit(*)            800-254-3948
3. AON(*)               800-266-3637
4. TIAA-CREF            800-223-1200
5. Marshall(*)          800-236-3863

                                     TAX. EQ. YIELD
                        RECENT        28%/31%         MIN.
Tax-free              30-DAY YIELD      BRACKET       INVEST.
1. Benham(*)            4.06%         5.6%/5.9%       $2,500
2. Strong               3.86          5.2/5.4          2,500
3. Vanguard             3.76          5.2/5.4          3,000
4. Calvert              3.69          5.1/5.3          2,000
4. USAA(*)              3.69          5.1/5.3          3,000
   NATIONAL AVERAGE     3.32%         4.6%/4.8%

                                             TOLL-FREE
Tax-free              WEB ADDRESS (WWW.)     NUMBER
1. Benham(*)          americancentury.com    800-472-3389
2. Strong             strong-funds.com       800-368-3863
3. Vanguard           vanguard.com           800-635-1511
4. Calvert            calvertgroup.com       800-368-2748
4. USAA(*)                --                 800-382-8722