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First-Time Buyers Lured by Lower Rates


A steady decrease in mortgage interest rates over the last three months to the lowest level since December 1999 has spurred some Southland home buyers, especially first-time buyers, to jump into the market, Realtors and lenders say.

The average rate for a 30-year fixed-rate mortgage with one point in Southern California reached its lowest level this year at 7.8% last week, down from this year's high of 8.6% in mid-May, according to Earl Peattie, president of Mortgage News Co.

After a steep decline in home sales last month, agents in all six Southland counties are reporting that buyers are testing the waters again, buoyed by the slip in interest rates, continued low unemployment and a rebound in consumer confidence.

"It looks like the rates will continue to drop," Peattie said. "The lower rates will help people who've been in the market on a marginal basis."

Economists say that weak borrowers--first-time home buyers who are struggling to qualify for a loan--are the major beneficiaries of the interest-rate drop. David Soleymani, a real estate attorney at First Capital Corp. in Santa Monica, said that he has seen a steep increase in mortgage applications from entry-level buyers, which he attributes to the decline in rates.

"Even a half-point drop in interest rates can make a difference between buying and not buying," he said. "It's always a catalyst."

George Ray, manager of BMAC Park Place Real Estate in Riverside, said he recently helped two home buyers who had been waiting for months for interest rates to drop so they could qualify for a loan.

"Suddenly they've jumped into the market," Ray said. "If the rates hadn't dropped even a little, they couldn't have done it."

Doug Duncan, chief economist for the Mortgage Bankers Assn. of America, put it this way: In May, when rates were at about 8.5%, a borrower would have locked into monthly payments of $1,538 on a 30-year, fixed-rate loan of $200,000. At a 7.9% rate, that monthly payment on the same loan would be $1,454, a 5.5% drop.

"As rates fall, affordability improves for the same size mortgage," Duncan said. He added that most economists predict that interest rates will remain where they are through next spring, when the Fed is expected to raise them a quarter point.

While dropping interest rates benefit entry-level buyers, new lending practices also have helped first-time borrowers, said John Karevoll, an analyst with DataQuick Information Systems, a La Jolla research firm.

Because lenders today have access to more information about prospective borrowers, they are better able to calculate their risk in making a loan, Karevoll said. In the past, when lenders were in doubt, they turned down the applicant. Today, 38% of Southern California home buyers are entry-level borrowers, compared to 25% 10 years ago, Karevoll said.

Home buyers, too, have become more aware about rising and falling interest rates and are more sophisticated about their mortgage options, real estate experts say.

"The Internet has made a huge difference," said Barbara McClelland, an agent with Century 21 Citrus Realty in San Dimas. "Sometimes the information overload confuses buyers, but there are so many loan programs available right now that it's making it easier for everyone to get in."

Home buyers have begun to veer away from 30-year fixed-rate mortgages, in favor of lower fixed rates during the first three to five years of repayment, followed by a switch to an adjustable rate.

"Historically, people went with the 30-year fixed loans," Soleymani said. "But in the last year, I've seen a dramatic increase in [adjustable-rate mortgages], even with the rates coming down."

Adjustable rate mortgages, or ARMs, reached a decade peak of 60.4% in Southern California in December 1994, and are again on the rise at 28%, about double the rate of the decade low of 13.2% in February 1999, according to Karevoll.

Irma Vargas, a broker with Tierra Properties in West Los Angeles, said that in the last two months, almost all of her clients chose mortgages that start with a five-year fixed rate, then switch to an adjustable rate.

"These mortgages are great for people who feel that in five years they won't be in their house," Vargas said. "They like the better interest rate you get with ARMs."

Falling interest rates have given the Southern California refinance market a slight bounce, after that market dropped 50% in the second quarter of 2000 over the same period last year, Karevoll said.

Karevoll predicted that if interest rates continue to drop and home values rise, an emerging pool of homeowners who were locked into higher-rate mortgages will refinance later this year.

Whether rates remain where they are or climb back into the 8% range, they are still lower than they were a decade ago.

"These rates are affordable," said Russell Fluter, an agent with Cannery Village Realty in Newport Beach. "Even before they dipped, historically speaking, these rates were very good."

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