Refinance Motivations … Re-evaluating the ARM
July, 2001 Surprisingly, an increasing number of applicants seeking a mortgage loan to refinance their homes are settling for a new loan carrying an interest rate that is no lower than their existing mortgage, or even at a slightly higher rate of interest. This was revealed in a study conducted by MGIC Capital Markets Group, a division of Mortgage Guaranty Insurance Corporation, a home insurer. The study report reveals that more homeowners are using the growing equity in their homes to manage other forms of consumer debt. They are using new and larger mortgage loans to pay off their credit cards, auto loans, department store charges and other debts. By consolidating their high-interest debt in one new mortgage loan, they save considerable outgoing payments each month, and interest charges. The new mortgage loan, even though it may carry an interest rate as high or higher than the previous mortgage, is totally tax deductible (in most cases). If done carefully and prudently, this type of home refinancing can be a very positive move for some homeowners. However, homeowners should plan thoughtfully before taking such action. If you’re inclined to use readily available cash for purposes not conducive to sound financial planning, this could be a very bad move. In fact, it could result in the loss of your home. * * * This might be a strategic time to re-evaluate the adjustable rate mortgage (ARM). In recent weeks, the spread between interest rates of 30-year fixed-rate loans and ARM loans has been widening. At this writing, the difference is about 1.5 percentage points. And that can save major bucks in just a few years of monthly mortgage payments. Also, there is an increasing number and variety of hybrid mortgage loans being offered – those that have a fixed rate for a few years, then reverting to an ARM – or the other way around. It will take some study and shopping to come up with just the right mortgage plan to best serve your personal needs, but it is well worth the effort. * * * The private mortgage insurance (PMI) industry has decided to take an active stance in educating consumers/borrowers on cancellation options. For many years, it seemed almost impossible for a homeowner to cancel those premium payments, paid each month with their regular mortgage payments. Even when their equity rose well above 20 percent of their property’s market value and the insurance coverage was no longer needed, those premium payments continued. In some cases, it should be noted, lenders made special efforts to advise their borrowers when the coverage could be cancelled. Finally, motivated by increasing media coverage among other factors, so many homeowners realized they were making these payments needlessly the PMI industry decided it was time to reverse their tactics in the interests of PR. The Mortgage Insurance Companies of America (MICA) now offer consumers a free online PMI “cancellation kit” to help homeowners learn when and how to cancel. ”It is indeed rare that an industry explains how the public can stop using its product or service,” said Frank Filipps, president of MICA. ”The kit we’ve posted on our consumer Web site will help borrowers determine if they are eligible to cancel their insurance, which is generally carried on conventional home mortgage loans with down payments under 20 percent of the sales price. ”The kit clearly directs consumers to their loan servicer for more specific information about their mortgage loan,” he noted. The kit contains a step-by-step guide to the PMI cancellation process, answering frequently asked questions by borrowers. It includes sample letters borrowers can use as a guide in communicating with their lender or loan servicer. It also includes background information on the Homeowners Protection Act – another motivating force that led to the creation of the kit and PR campaign. And it provides a glossary containing definitions of industry terminology. ”Together with the cancellation calculator already in place on your Web site, this latest online feature underscores our industry’s commitment to the proposition that borrowers should not have to pay premiums longer than absolutely necessary,” said Suzanne Hutchinson, executive vice president of MICA, in a press release – echoing the industry’s new PR approach. ”Cancellation of private mortgage insurance premiums should not be difficult or costly, therefore we’ve developed this kit as an alternative to the various fee-based services now available.” * * * The real estate appraising industry is experiencing a love-hate response to the current and growing wave of computer systems used in real estate sales transactions. On one hand, special real estate and appraising software programs have greatly eased and expedited research needed to establish current market values for properties. Instead of going to the county court house, they now simply click on a few strategic points on their computer screen and they have the ”comparable sale” data needed. Also, an increasing number of real estate related Web sites provide directories of appraisers in any local community, thus creating a highly effective marketing tool for participating appraisers. This often produces clients the appraiser would never have without this resource. On the other hand, computer systems also make it easier for mortgage lenders and other non-appraisers to access data needed to establish the current value of properties. It some cases, it takes jobs away from appraisers. A recent announcement from one of the nation’s largest buyers of existing mortgage loans indicated they would now accept loans where there was no full-blown appraisal to establish value. This only applies to certain types of properties where sufficient data can be accessed via computer programs to establish a reasonably accurate assessment of the property’s value. This, in turn, motivates retail lenders to accept loan application packages without a full appraisal, saving money for the applicant borrower and time in processing the application. The ”quick and dirty” value assessment still costs the applicant a fee, but not nearly as much as a full appraisal. To compensate for this potential loss of business, appraisers are becoming more progressive in their marketing strategies. In some cases they are targeting major Web sites for their primary marketing outreach. | 
