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February 25, 2000     Cape Gazette
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February 25, 2000

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40 - CAPE GAZETI&apos;E, Friday, February 25 - March 2, 2000 BUSINE ;S & REAL ESTATE Rising fu, ,1 costs plaguing local businesses 1980s and 1990s - until now. Since early January, the price of gasoline at local pumps has jumped from $1.12 to $1.36 for regular unleaded and up to $1.55 for high octane unleaded. Nation- wide, the average price for a gal- lon of gas is $1.46, slightly above the local average. Industry ana- lysts are predicting the price will go up to $1.70 a gallon by sum- mer. "Just in the past 30 days, the cost of gasoline has gone up at least a dozen times," explained Brian Pepper, whose family owns the Pep-Up chain of service sta- tions on Delmarva. "It goes up overnight anywhere from a tenth of a cent to a cent. And I believe we'll be seeing some 1970s-era prices by summer." As it was in the 1970s, the root problem of the rising cost of fuel By Jim Cresson It's not yet on a par with the mid:1970s, but anyone who re- calls the skyrocketing gas prices of that period is dreading what they're seeing at the pumps right now - and what may come next. In the years between 1974 and 1978, gas prices rose from less than 50 cents a gallon to more than $1.75 before settling at levels just above $1 a gallon for the Jim Cresson photo Fuel costs in the nation are averaging $1.46 per gallon, slightly above the local average. The price is the highest it has been in nine years. It is expected to hit $1.70 per gallon by summer. is laid at the doorstep of oil-pro- ducing nations, which collectively agreed to cut their output of crude oil by 5.2 million barrels daily af- ter prices dropped below $10 a barrel in 1998. The cost is up to $30 a barrel now, but the oil-pro- ducing nations plan to keep the production-reduction in place un- til April. But there are other caus- es cited by local industry experts that play into the problem as well. Gary Patterson, executive direc- tor of the Delaware Petroleum Council, said three recent warm winters had lowered the produc- tion of refinel'ies across the na- tion. "There are other factors, as ,well. Congressional mandates over the years have stopped do- mestic oil exploration in Alaska, parts of California and the Gulf Coast of Florida," said Patterson. "Also, about 400 refineries have closed in America since the early 1980s. Yes, commodities play a factor in the oil price, but I'm concerned more about the public policy decisions in Wash- ington that have limited our do- mestic ability to produce crude oil," he said. "Normally, 50 percent of our crude-oil needs is supplied do- mesticaily, and 50 percent is im- ported. Now we're operating on a 40-60 split, with heavier depend- ence on imported oil, which has dropped in production and risen in price," said Patterson. Patterson said the current rising cost of gasoline is also the result of production shortfalls of heating oil in the Northeast. "After three warm winters, nobody expected a cold one this year," said Patterson. "Heating oil stocks were low in the Northeast, and now refineries are working hard to produce more." Patterson declined to spec- ulate where the price of gasoline will top off before this mini-crisis is over. Charlie Marsch, whose family operates Ocean Bay Mart Amoco in Rehoboth Beach, said the high prices are tough on everyone: gasoline distributors, station own- ers and the customers at the pump. "We never know until the distribu- tor's truck driver gets here if the price is going up again," Marsch said. "But we Americans have had it easy over the years. Gas is $2 or $3 a gallon in Europe. And think about this: a 20-ounce bottle of Gatorade is $1.59, or $10.17 a gallon. Be grateful cars don't run on Gatorade." The petroleum council's Patter- son takes that comparison a bit farther. "I figured it out one morn- ing: If my car ran on my contact lens solution, it would cost me $832 a gallon. Looking at it that way, gasoline is pretty cheap." Don't panic be It's both true and unfortunate that mortgage rates have risen in recent weeks, but you haven't run out of options to keep your rates and payment low. The following are seven things you'll need to know when rates are rising or have risen, and you might be able to help yourself to some savings. Don't panic. Mortgage interest rates are notoriously fickle, fol- lowing the whims of the bond market. While it's true that interest rates rise much more quickly than they fall, even a sharp jump in one day or week can be erased over the next week or two. The current 30-year fixed rate mortgage, at an average of just over 8 percent, still ranks among the low points of not only this decade, but well below the rates of 1996, for example. Plus, even a one-half percent rise means only a $34 increase for a $100,000 loan. (7 to 7.5 percent used for example). Consider another product. To- day's mortgage market features a wide array of products, from long- term fixed rate to short term ad- justable. If a 7.5 percent, 30-year fixed rate mortgage busts your budget, maybe a 5.5 percent Hy- FINANCIAL FOCUS PATRICK DIAMOND brid ARM will fit the bill. These have a fixed interest rate for the first five years at roughly one-half percent below the 30-year fixed; you get in at a rate you can afford, but must pay attention for oppor- tunities to refinance, since after five years your rate will change once per year. Hybrid ARMs also come in 3/1, 7/1 and 10/1 flavors; the longer the fixed period, though, the lesser the interest rate savings. What about a 2-1 buydown? With a 2,1 buydown, you start tse mortgage rates are higher with an interest rate that is about two percentage points below the market rate for the first year. After that, the rate steps up by 1 per- centage point in the second year, then rises by 1 percentage point a final time for the 3-30 years. The catch: the final interest rate usual- ly ends up about one-half percent above what you would pay today. So, rather than getting 8 percent today, you get 6.5 percent in the first year, 7.5 percent in year two, then 8.5 percent for the remainder of the loan. Pay more points to lower the rate. If you've got spare cash that you can use, it's possible to pay additional points to lower the in- terest rate. Each point will cost you 1 percent of the loan amount, so it's not a cheap option, but each point should lower your interest rate between 1/8 percent and 1/4 percent, depending on the product you choose. As an example, if you pay two points, you can lower that 7.5 percent to 7 percent for $2,000, which you'll get back at $34 per month - you'll break even in about five years. If you can qualify, you needn't pay these out of pocket, as you may be able to add them to the amount you're borrowing, especially in a refi- nance transaction. Take a shorter commitment period. One of the lesser known facets of mortgage pricing (rates) is that lenders offer a wide variety of commitment periods, often 30 days, 45 days, 60 days and longer. The commitment period is simply the time expected to close the loan, and mortgage lenders often quote an 'average' one, like 45 days. If your paperwork is in or- der, and you're a good credit qual- ity borrower, you might be able to close your loan in only 30 days, and your rate will be slightly low- er as a result of the shorter com- mitment period. It's worth asking about. Offset the rise in rates with a bigger downpayment. You can still keep your monthly costs down if you've got the money to do so. That $100,000 mortgage at 7 percent has a monthly payment of $665.30; to achieve that pay- ment at 7.5 percent, you'll only need to borrow $95,149, which means you'll need to come up with an additional $5,000 to keep your payment level. If you're cashing stocks to generate your downpay- ment anyway, you might consider this an option. Get a floatdown option. Think rates might be lower by the time you close, but are too afraid to let your rate really float? A floatdown option may be the best of both worlds. In it, you can usually pay either a small fee (one-eighth to one-quarter point is common) to have access to lower rates if they fall during your commitment peri- od. Another method sets limits of how high or low your rate can travel during the commitment pe- riod. Another method sets limits of how high or low your rate can travel during the commitment pe- riod, but y6u may start at a rate that is higher than market to start' with, i.e., 7.625 percent with a floatdown option to 7.25 percent versus 7.5 percent with no float- down option. Best of luck! Editor's note: Patrick Diamond is president of First Atlantic Mort- gage Services LLC of Lewes and can be reached at 645-9181, on- line at <> and via e-mail at <pdl @bellat-\>.