Reasons remain to refinance
Mortgage bankers are fond of saying that the
refinancing boom is over, even as huge numbers of homeowners continue to stream
into mortgage offices to refinance their loans.
2004 is expected to be the sixth-biggest year ever for
refinancing home loans. Doug Duncan, chief economist for the Mortgage Bankers
Association, estimates that homeowners will refinance $447 billion this year.
That's a big dropoff from 2003, when homeowners refinanced $2.2 trillion. But
this year's projected $447 billion in refinancing is still a big chunk of change.
Compare to 1990, when total mortgage volume -- for purchases and refinancings
-- was $458 billion.
People have many reasons to refinance, even now: to get rid of
mortgage insurance, to switch from a fixed-rate loan to an adjustable or vice
versa, to extract cash from a house that has grown in value and, of course,
to lock in a lower rate.
When you borrow more than 80 percent of the home's sale price, you usually have
to buy mortgage insurance. The amount you pay depends on the percentage of the
home's price that you borrowed, called the loan-to-value ratio. A way to get
out of paying mortgage insurance is to get a "piggyback loan" -- a
second mortgage on top of a first mortgage for 80 percent of the home's price.
If you pay for mortgage insurance and your mortgage is more than
two years old, you might be able to get rid of the mortgage insurance payment
by refinancing the loan. This will work if the home has appreciated in value
substantially. If your current loan balance is less than 80 percent of the reappraised
value of the home, you can refinance and get rid of mortgage insurance.
There are a lot of catches and caveats, so you should call your
mortgage servicer to find out if you qualify to refinance
your way out of paying mortgage insurance.
Hello to ARMs
One of the biggest reasons to refinance is to switch from a fixed-rate loan
to an adjustable-rate loan, says Doug Perry, first vice president for Countrywide
Home Loans. He believes that a lot of homeowners would benefit from switching
to what he calls "fixed-period ARMs," also known as hybrid ARMs. These
adjustable-rate loans have a fixed rate for a specified period, then adjust
annually thereafter. One with an initial rate that lasts three years, then adjusts
annually, is called a 3/1 ARM. The rate on that initial period is lower than
the rate for a 15- or 30-year fixed-rate loan, so borrowers save money.
Perry gives a hypothetical example of a homeowner who refinanced
in 2002 to a 30-year fixed-rate loan. "They don't have any intention to
stay in their house another 28 years and they call in and realize that, 'Gosh,
I can save a lot of money by refinancing and going to a fixed-period ARM,'
" Perry says.
Bankers say that a homeowner who plans to move up to another
home in three or four years can save a lot of money with little risk by refinancing
from fixed-rate loans to 3/1 ARMs, whose initial rates are often about 2 percentage
points lower than the rates for 30-year fixed loans. Homeowners who plan to
move in five or six years would benefit from switching to 5/1 ARMs, whose initial
fixed-rate period lasts five years.
Dave Herpers, director of consumer affairs
for mortgage lender Amerisave, appeared on a TV call-in show recently, and a
caller said he had refinanced 10 months ago from a 30-year fixed loan to a 15-year
fixed. He got a lower rate and, although the monthly payment went up $100, he
was on schedule to pay off the loan in half the time. The caller said that his
wife is pregnant now, and they really miss that $100 a month. After talking
with Herpers, they plan to get a 3/1 or 5/1 ARM to be repaid over 30 years,
which will reduce the monthly payment a lot.
Homeowners have become much more savvy about mortgage financing
in the last couple of years, bankers say. Herpers credits consumer-information
Web sites such as Bankrate.com, as well as lender Web sites that are chockablock
with mortgage calculators.
"I think people are more educated and aware of mortgage
lending and home equity lending to manage their personal finances," Herpers
says. A couple of years ago, callers to the CNNfn show that he appeared on wouldn't
have known to ask about piggyback loans. Now they ask about the tax implications
of refinancing to get a piggyback
home equity line of credit to pay for the kids' college tuition.
Extracting cash from a home's equity is another reason to refinance. One way
to do it is via a cash-out refinancing. Here's how it works: Let's say you owe
$50,000 on a house that you bought for $100,000. Now the house is worth $150,000.
You could refinance for $100,000 and receive $50,000 in cash to buy a Hummer,
cruise to Europe in a luxury suite aboard the Queen
Mary 2, pay the kids' tuition, or remodel the house.
Another way might be to get one of those piggyback equity loans.
In the above example, instead of taking out $50,000 cash, you could get a home
equity line of credit for that amount. It's a revolving credit line that can
be used for intermittent or recurring expenses such as tuition or home remodeling
There are a few other reasons to refinance, says Frank Previte,
president of Houston-based Alpha America Mortgage. People who got rural development
loans from the U.S. Department of Agriculture weren't able to refinance under
the program until not long ago; now they can.
Previte says there's a lot of pent-up demand for the refinancing of manufactured
homes. Because of a high number of loan defaults based on loose lending standards,
some troubled lenders dropped out of the market, and mortgage titan Fannie Mae
tightened lending standards last year. Amid the turmoil, some people were unable
to refinance their loans on manufactured homes. Now they can take advantage
of lower rates.
Another big group of potential refinancers consists of people
who had lousy credit when they bought their homes a few years ago, and have
cleaned up their act and raised their credit scores since then. "They may
have a rate of 8 to 11 percent, depending on just how bad their credit was,"
It often makes financial sense for someone with a poor
credit history to go ahead and buy a house, then pay all bills on time for three
years. "After three years, they should have their credit in shape and should
go ahead and do an orderly refinance" at the prevailing rate for borrowers
with good credit, Previte says. They can get 30-year loans but ask their lenders
to put them on schedule to pay off the loans in 27 years.
-- Posted: April 6, 2004