Adjusting to higher interest rates

Homeowners with adjustable rate mortgages up for adjustment could face hundreds or even thousands of dollars in higher mortgage payments annually because of rising interest rates.

"We're seeing some people in that situation. Probably not as many as some other parts of the country, though," said Blaise Johnson, director of lending for Gate City Bank in Fargo.

Local bankers estimate that less than 20 percent of local mortgages are adjustable, with the rest fixed.

Nationally, about one-third of mortgages are the adjustable variety.

With fixed-rate mortgages, the rate of interest holds constant over the loan's life. That appeals to many area homebuyers, bankers say.

In contrast, the interest rate of an adjustable rate mortgage is periodically adjusted to reflect changes in an index. Those indexes have risen over the past five years.

Some numbers provided by Gate City Bank illustrate the change:

A Gate City Bank borrower who took out a $100,000 adjustable rate mortgage loan five years ago paid a 6.35 percent rate and a monthly payment of $622.24.

This year, that borrower's rate would be adjusted to 7.74 percent, with a monthly payment of $709.39.

That's a monthly increase of $87.14, or $1,045.80 annually.

Rising rates are particularly troublesome for homeowners who took out adjustable rate mortgages with initially low "teaser" rates, said Ron Jordan, who heads real estate lending for State Bank of Fargo.

The rates of such mortgages - sometimes obtained from Internet lenders - are prone to big rate increases, he said.

Switching to a fixed-rate mortgage, which have held much steadier over the past five years, is an option for folks with adjustable rate mortgages due to rise.

But the switch could require paying fees that eat up much of the potential savings.

Bankers say it's important to compare potential mortgages and to make sure you understand exactly what you're offered.

Keep the recent rate increases in perspective.

The 30-year fixed-rate mortgage remains well below the 20-year average of 7.88 percent.

Don't even think of whining about current rates to folks who took out mortgages in the early 1980s. Annual rates were 16 percent or more then.

"The rates are still really good," said Brooke Ames, mortgage loan officer for State Bank of Hawley's Moorhead office.

"This is still a great time to finance a home."

Readers can reach Forum reporter

Jonathan Knutson at (701) 241-5530