Real Estate NewsGreat Idea: The Automatic Rate Reduction Loan
How would you like an adjustable mortgage that adjusts only down
to lower percentage rates?
When the rate dropped you wouldn"t have to file a refinance
application, you wouldn"t have an early pay off penalty and you wouldn"t
be saddled with new loan fees.
Think about it: an automatic refinance, without the hassle and without
the cost of a traditional redone mortgage.
"Consumers have inherently disliked ARMs because the potential for higher
rates and bigger monthly payments," said Peter G. Miller, creator of the
consumer Web site, OurBroker.com. "But
if we have a product where the initial rate is the cap rate, and if rates can
only decline, then consumers will plainly want to consider this loan option. If
the initial rate and associated costs for points and fees are within reason,
this could be a very desirable mortgage product," said Miller, also author of
the yet-to-be-released, "Common Sense Mortgage" (NTC/Contemporary). Well, it"s
here, though not without caveats generally associated with "innovation".
A small number of small lenders have begun to introduce just such a
mortgage that could change the way mortgage lenders do business.
Always an innovator, California is serving up one. San Diego-based City
Line Mortgage Corp. offers what it calls an "automatic rate reduction loan" for
customers in Southern California, Arizona and Washington.
When the market rates drop by half a percentage point below your current
rate, the mortgage lender refinances you to market level -- at zero cost.
To qualify for the reduction, mortgage holders must have a year-long
on-time payment record and maintain their good credit standing and income at
the level they were when they originally obtained the loan.
The other coast offers one too.
Fairfax, Va.-based Service Saver Finance will refinance with no closing
fees when your loan rate is one-half to three-quarters of a percentage point
higher than the going market rate. No credit checks, no appraisals, no income
verifications. As with the City Line deal, you must have an excellent payment
record.
What"s the catch?
It"s a gamble. First, to offset the risk of plummeting rates, lenders will
likely
charge more up front than a conventional mortgage.
"If you pay 1/4 percent more in the beginning, are you going to get the
best rate with this mortgage?" asks Warren H. Myer, president of Myers Internet Services, a top-rated Web
development company specializing in Web development services for mortgage
companies.
"If rates are 7 percent and this mortgage is 7.25 percent and rates
drop to like 6.75 percent, 6.75 percent might not be the best rate in
the market," Myer said.
You might be better off paying the extra fees and suffering the traditional
refinance hassle if you are going to stay in the home long enough to realize a
better saving on the traditional refinance.
"It will be good for certain types of people with lower mortgages that are
hard to refinance because you can"t get the special deals that you can with the
larger loans," Myer added.
The automatic refinance lenders have designed the loans to generate
customer loyalty. Lenders often loose borrowers in droves whenever rates fall
and home owners refinance elsewhere to get the best rate.
There are sizable profits to be had servicing loans -- collecting monthly
escrow, principal, interest and property taxes as well as mortgage
record-keeping. Servicers who buy servicing rights, collect annual fees for the
work, as much as 0.5 percent of the loan amount -- for as long as the servicer
can hold onto the loan.
If servicer holds onto loans it can afford to absorb lost closing costs
from a traditional refinance because it won"t lose servicing income.
"For people who are too busy to track rates or figure out the cost to
refinance loans, this is for them. When you are taking out these loans just be
sure to look at the alternatives," said personal finance advisor Eric Tyson,
co-author of "Mortgages for
Dummies" (IDG Books, $16.99).
Tyson also questions the new loans appeal in the current market. "This
would have been good loan 10 years ago. Now, how much lower are rates going?"
Tyson asked.