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,
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 bills.
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,” Previte says.
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.