Builder programs lock in today's low mortgage rates

Hoping to turn hundreds of condominium shoppers into homeowners, Chicago developers and lenders are teaming up to offer 5 percent down payments and free home loan “rate locks” that will offer current low interest rates for up to 24 months, real estate experts say.

According to Freddie Mac’s Primary Mortgage Market Survey, mortgage rates in mid-March were holding at a 40-year low. Thirty-year fixed-rate mortgages averaged 5.61 percent nationwide, and one-year Treasury-indexed adjustable-rate mortgages (ARMs) hovered around 3.68 percent.

However, only crystal ball gazers know where interest rates will be a year or two from now, analysts say. That’s why condominium developers have put together programs that lock interest rates at today’s low levels for nervous buyers who sign contracts now but might not close until as late as early 2005. In some cases, the rates will be locked for up to seven years.

“As an inducement to purchase a new condominium at the 99-unit Residences at 950 W. Monroe, Garrison Partners has contracted with US Bank to offer exclusive 18-month and 24-month rate-lock programs,” says Garry Benson, partner in Garrison Partners, a major Chicago-based sales and marketing consulting firm.

“Under the rate-lock deal, we are paying the origination and commitment points,” says developer Philip Mappa, a partner in MR Properties. “The only costs to the buyer are the normal closing fees and appraisal fees of about $500 to $700.”

Mappa says the rate quoted to the buyer at the time of purchase is fixed for up to seven years. Buyers won’t pay more than the quoted rate during this period, though they could pay less, if rates haven’t increased by the time of closing.

Here’s how the Garrison Partners/US Bank rate-lock works: If you opt to lock in rates for 18 months, you can choose from an assortment of one-year to five-year ARM loans at today’s rates and never see a rate increase higher than the cap – .625 percent. So if you locked in at 5 percent today, at closing the rate could not be higher than 5.625 percent, even though rates in a year and a half might be at 6 percent. For 24-month rate locks, the cap is .875 percent.

At 1111 S. Wabash, a 34-story South Loop highrise scheduled for initial occupancy in December of 2003, the Gammonley Group is offering a 5 percent down payment and special financing that allows buyers to lock in mortgage rates for delivery later this year or in early 2004, said Audra Hall, sales manager for New West Realty, exclusive sales and marketing agent for the development.

Under one rate-lock deal, through Mid America Bank, a buyer at 1111 S. Wabash could purchase a one-bedroom plus den condo for $265,000 and lock-in a 4.25 percent interest rate on a three-year adjustable-rate mortgage, or a 5.875 percent rate on a 30-year fixed loan.

The lock fee, 1 percent of the loan amount, would be $2,517.50 with a 5 percent down payment. However, the fee does not go in the lender’s pocket. It is escrowed to pay the buyer’s closing costs.

What happens if interest rates rise by the end of 2003?

“In the worst case scenario, the rate increase is subject to a cap of .875 of 1 percentage point,” says William Arnold, a loan officer for Mid America Bank. “So if rates take off, the buyer’s rate could not rise higher than 6.75 percent on the 30-year fixed loan.”

If rates stay at 5.875 percent, the monthly principal and interest payment for the $265,000 condo would be $1,489 on a 30-year fixed mortgage. If rates rise as high as 6.75 percent, the payment would rise to $1,632, Arnold said.

If the borrower opts for a three-year ARM amortized over 40 years at 4.25 percent, the monthly principal and interest payment for the $265,000 condo would be $1,091. In the worst-case scenario, if rates rise as high as 5.12 percent, the monthly payment would rise to $1,234, he said.

At Union Lofts, 939 W. 35th St., in the Near Southwest Side neighborhood of Bridgeport, Tandem Developers, LLC and Wells Fargo Home Mortgage have launched a one-year rate lock.

Co-developers Paul Marks and Paul Dincin say first-time buyers who purchase a $173,900 condominium with 5 percent down can own for about the same monthly cost as renting, after tax deductions.

Assuming a down payment of $8,675 and a locked home loan rate of about 5 percent on a $165,205 mortgage, monthly principal and interest payments for the loft would be about $900.

Real estate columnist and media consultant Don DeBat has written about Chicago-area housing and mortgage markets since 1968. He is president of Don DeBat and Associates, www.dondebat.net.

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